Review of the Business Finance Guarantee Scheme
In 2022, BERL conducted a review of the Treasury’s Business Finance Guarantee Scheme (BFGS). The BFGS was implemented in response to the potential tightening of credit conditions resulting from COVID-19. Its objective was to cushion the impact of the pandemic on small-to-medium sized enterprises by facilitating the provision of credit.
The BFGS encouraged lenders to look beyond the current economic cycle, and take the uncertainty caused by the pandemic into account when making lending decisions. With the intention to support the flow of credit by reducing the credit risk which banks face when lending, the Crown guaranteed 80 percent of a loan’s default risk. This covered overdrafts, revolving credit facilities and term loans.
The Treasury engaged Business and Economic Research Limited (BERL) to undertake a post implementation review of the BFGS. The scope of the evaluation focussed on five key questions:
- Did the BFGS achieve its objective?
- Did changes made to the scheme contribute to an uptake in utilisation?
- Could the process to establish the BFGS have been improved?
- What aspects of the BFGS were effective in achieving its objective, and what can be learned from the less effective aspects of the scheme?
- How effective is the on-going management of the scheme, and guarantees issued under it?
In order to answer these five key questions, BERL conducted semi-structured interviews with all BFGS participants, and other related stakeholders.
The general consensus from lenders was that the BFGS achieved its objective.
Most of the interviewees shared the opinion that the BFGS helped to ensure lending to marginally viable firms and reduced the risk of banks not lending to these firms. The BFGS resulted in many loans with reduced interest rates and restructured debts. Such loans reduced financial burdens, interest rates, and anxieties for firms. Many lenders commented that the government’s guarantee was a positive factor in getting borrower’s applications over the line. However, lenders noted that they were committed to supporting their customers, most of the lending would have likely occurred anyway, and many of the loans did not require a guarantee.
A reoccurring observation was that the process to establish the BFGS could have been improved. The Treasury did make changes to the BFGS. The changes increased the number of borrowers as well as the value of lending the BFGS covered. The changes to the BFGS included expanding the criteria for borrowing, the extension of the loan period, increasing the loan value, widening the scope to include refinancing, including non-deposit taking lenders and clarifying personal guarantees.
Interviewees were clear that these changes contributed significantly to the uptake. Lenders also stated that the changes that were made should have been included from the outset.
The overall view of BFGS’ participants was that the management of the BFGS has been effective since the changes were made. Participants were pleased with how the BFGS was being managed. Although few claims from lenders have been made on BFGS loans, those who have had to make a claim have indicated that the process was clear and painless. Lenders expect that the number of claims will increase as BFGS loans near the end of their term. It was suggested that, because COVID-19 has had a longer lasting impact than many initially thought, the BFGS should be reviewed as loans reach maturity, and the potential to extend to extend loans’ terms and guarantee should be considered.