MDB’s COVID-19 Guarantee Scheme proved crucial in keeping businesses afloat

The COVID-19 Guarantee Scheme was crucial in helping to keep numerous businesses afloat during the pandemic, the chairman of the Malta Development Bank told BusinessToday.

Prof. Josef Bonnici said that the scheme was hugely successful in providing a much-needed lifeline for businesses that saw their revenue stream swindle or - in many cases - drop to zero because of the pandemic and the measures introduced to mitigate its effects.

Without the scheme, commercial banks would never have been in a position to assist ailing businesses due to financial and business considerations.

The CGS was launched by the MDB in April 2020 and has since assisted more than 560 businesses, collectively employing over 40,000 persons.

The supported businesses, which received a total of more than €440 million in working capital loans through nine partnering commercial banks, range from hotels to large retail outlets but also to smaller firms across all economic sectors.

The scheme facilitated access to finance to businesses whose liquidity was seriously affected by the pandemic. The CGS greatly enhances access to bank financing to cover working capital costs, at lower interest rates and lower collateral requirements.

Firms in the tourism-related sectors (particularly accommodation & food services activities, and wholesale & retail activities), which were the most adversely impacted by the pandemic, have collectively been granted close to €200 million, or over 45%, of total loans sanctioned under the CGS.

Bonnici said he was extremely satisfied that nine commercisl banks had signed up to participate in the scheme; of those, eight had never participated in a guarantee scheme before.

“The banks quickly agreed to sign up and agreed to two majore stipulations,” he said.

“They had to sign a risk-sharing agreement and they also had to sign a service-level agreement.”

Under the risk-sharing agreement, banks agreed to lower interest rates on loans granted to businesses under the scheme.

And the service-level agreement grants MDB the right to oversee and audit the bank’s processes and transactions under the scheme, to confirm full compliance with its parameters. After all, the MDB  and the scheme too are subject to audit by the European Commission or the NAO.

Bonnici said the scheme had been successful also becuase, thus far, only banks’ funds had been and there has, as yet. been no need for the government to provide any money to cover its guarantee.

“What we have done is unleash the facilities of commercial banks to soften the blow the pandemic was proving to have on Maltese businesses,” Bonnici told BusinessToday.

“Commercial banks are making a small return while utilising their funds to sustain the economy without endangering their own economic standing.”

During the first twelve months of the CGS operations, the average loan per facility of the 560 beneficiaries stood at around €785,000.

Out of these beneficiaries, 500 firms, almost 90% of the total, were SMEs. The average loan size of SMEs amounted to around €470,000, as opposed to an average of €3.1 million granted to larger entities.

The CGS and other initiatives managed by the MDB have contributed significantly to improving liquidity and access to finance on a national level.

As at end of the first quarter of 2021, loans covered by MDB guarantee schemes accounted for more than 10% of the over €4 billion outstanding loans extended to non-financial corporations (NFCs).

Official data also shows that during the same timeframe, lending to NFCs expanded by an annual rate of close 8.0% in March 2021. Without this MDB’s intervention, such lending would instead have contracted by 4.0%.

Extending the CGS

The MDB has recently obtained the European Commission’s approval to prolong the applicability period of the Scheme by a further three months to 30 September 2021.

Moreover, the Commission also approved that the maximum moratorium period that commercial banks can provide under the CGS, which now can be extended by a further six months up to 18 months, on a case-by-case basis.