The emergency measures introduced by the government in March 2020 did not take a second lockdown nor a second wave of Covid-19 into account. While many SMEs are watching their revenue collapse once again, banking system players have to anticipate and fluidify the process of reimbursements planned to start in spring 2021.
For credit institutions and banks, the reinstatement of the public health state of emergency since 17 October promises to complicate the management of already technical, time-consuming files. Before they understood the extent of adaptations required, many banks attempted to establish internal taskforces (or reinforce existing teams), whose objective was to rise to this challenge quicky with temporary solutions. In hindsight, while some are considering simply hiring supplementary staff to process these unique files, it is becoming clear that the entire system has to be overhauled to take companies facing major difficulties into account. Government-backed loans, or GBLs, are one of the main focuses.
In the first quarter of 2020, the French government allocated a budget of 300 billion euros to support the economy in the form of cashflow loans. In an effort to help businesses pay their overhead costs (rent, salaries, etc.) despite reduced or non-existent revenue, the government offered to act as a guarantor for 70 to 90 percent of these loans. This simple, efficient system was mainly used by SMEs, and 123 billion euros in loans have been distributed so far – 89 percent of beneficiaries are also businesses with fewer than ten employees.
In theory, companies should be allowed a 12-month extension before deciding between repayment in full or an amortized reimbursement plan over five years with interest rates lower than 2.5 percent. However, this initial system will have to be reworked to adapt to the developments of the crisis in France.
An increasingly complex situation
Not only has access to GBLs been extended (the loans are now available until June 30, 2021), but the sector’s stakeholders are campaigning for other amendments and a case-by-case approach. Some companies, among the smallest and those in the most impacted sectors, may only be able to repay the part of the loan not guaranteed by the government – between 10 and 30 percent. Other potential developments include a “consolidation loan” that would combine all sums and extend repayment over more than five years. This is because some see the GBL framework as “too short” with reimbursement impossible following the second lockdown. Meanwhile, banks are asking for increased flexibility but want to retain the coveted government guarantee.
The start date for the repayment phase is still being negotiated. The government is looking to postpone it for one year to offer businesses “breathing room,” especially for those whose activity is directly impacted by the consequences of the lockdown. For this second phase, banks will once again have to produce reports for the BPI. This requires collecting and centralizing information needed for the declaration, producing declaration flows so the BPI can check application eligibility, and being operational for the monitoring and processing of files.
The declaration conditions were defined in the third quarter of 2020 and may well change before the repayment of the first GBLs. With the accumulation of loans over a longer period, needs will change and several challenges will appear:
- Remaining flexible and adaptable despite changes and uncertainty, both within the company and in the conditions negotiated between the government and sector stakeholders
- Being as responsive as possible in applying new rules and limiting the rejection of applications, as each rejection adds to overall workload
- Securing and reducing application processing costs by automating information collection and the declaration process via adapted software packages
- Prioritizing the identification of rejected applications to process them in good time
It should also be noted that the risk of these loans – while reduced thanks to government participation – is not negligible, and regulators fear a spike in unreliable debts over the coming months. Emerging from this system will be difficult given current economic activity and the second lockdown. According to a study carried out by McKinsey this summer and published on October 20, 2000, some 17 percent of French SMEs were concerned they would be unable to repay their loans and more than one in ten were worried about going bankrupt in the next six months.
As a result, there are several risks to anticipate. The start of the amortized repayment period could increase debt and the return of payment obligations for various overhead costs may lead companies to simply go bankrupt. It is therefore necessary to adapt as much as possible while keeping in mind the reduction in costs associated with managing large numbers of files and seeking assistance from experts in information collection and declaration processes.