Business owners who approach the National Youth Development Agency (NYDA) for finance will no longer have to worry about making repayments. After four years of struggling to lend out loans to small businesses, the NYDA's board took a decision in May that the agency would no longer give out loans.
In its place the agency will offer grants of between R1 000 and R100 000 to survivalist micro firms. Previously the agency had offered loan finance of up to R5-million. Since its launch in 2009, the agency has struggled to collect on outstanding loans and defaults soared to 47% in 2011/12. As the agency continued to face increasingly lower allocations from the fiscus, its available funding to business owners has also been reduced.
The Industrial Development Corporation (IDC) and the Small Enterprise Finance Agency (Sefa) have made R2.7-billion in loans available to young entrepreneurs over the next five years, offering a solution to the NYDA's lending problems.
New NYDA chairperson Yershen Pillay said the agency would complement the loan finance offered by the IDC and Sefa with business support and mentorship. Pillay, who was appointed in March, said the agency had about R25-million that would fund business vouchers and mentorship support and allow it to disburse grants to about 37 000 young people. He also said that the agency was still considering whether to increase the limit for grants to R500 000.
Reclaiming its credibility
The move by the board was informed by the need to "restore credibility to the NYDA" to fend off recent criticism that it wasted millions of rands on hosting a number of youth conferences, he said.
The decision to drop loan finance and focus on education and skills development was taken because only 4.6% of people between the ages of 15 and 24 derived their income from business-related activities. But with its dismal past experience in small business lending, questions are still being asked as to why the NYDA is being allowed to continue with financing entrepreneurs at all.
A parliamentary reply in April by the Minister of Performance Monitoring and Evaluation Collins Chabane revealed that of the R7.1-million in finance that the NYDA had advanced as micro business loans in 2011/12, R3.8-million had been deemed irrecoverable, while a further R1.4-millon had not been repaid by borrowers.
The fact that more than half of micro-loans disbursements are irrecoverable raises serious questions. Did these businesses shut down? Were they really businesses to start off with? And is the move to hand out grants, rather than loans likely to result in the same outcome?
Chabane has detailed a number of measures to collect outstanding repayments using debt collectors and court judgments. He said some clients had already started calling in to make the necessary offers and arrangement to settle their outstanding loans.
Youth refuse to pay back 'government' money
To get an idea of how the agency has struggled to lend and support young entrepreneurs, one need only compare its performance with that of its predecessor, the Umsobomvu Youth Fund (UYF) which merged with the National Youth Commission to form the NYDA.
Before the NYDA took over the UYF's loan book, the fund recorded a 12.1% default rate (for 2008/9). As of March 31 last year impairments had climbed to 47% of the NYDA's R343.9-million book value in loans, according to the agency's 2011/12 annual report.
NYDA chief executive Steven Ngubeni has put the increasing default rate down to a number of borrowers being reluctant during the merger between the UYF and the commission to honour their commitments to repay loans, thinking that the UYF would be dissolved and therefore loans would be written off. But, more concerning, Ngubeni noted that certain loan beneficiaries had chosen to deliberately default on their repayments.
"Some, if not most, of the young people that we have funded are not paying, not because they are unable to pay, but because they feel entitled to the funds as they are provided by the government," he said.
Repayments are not the only thing to have taken a knock. Loan disbursements, jobs created or supported by funding and business vouchers handed out have also fallen. Loans disbursed fell from R86.8-million in 2008/9 under its predecessor to R26-million in 2011/12, while jobs supported or created through funding dropped from about 23 000 to 9 000 over the same period, and business vouchers plummeted from 12 095 to 2 276 during this time. Along the way the NYDA also wound up funds that the UYF had partnered with private-sector players FNB, Old Mutual and Business Partners.
Political pressure must be removed
The UYF's mandate had included support to women-owned businesses, which may have provided the NYDA's predecessor with a larger target market and mitigated the risk, because women are often better payers of loans than men are. But the performance still paints a poor picture of the agency's performance. Malose Kekana, who served as chief executive of the UYF, claimed that during his tenancy, the fund had had what he called "an obsession" with the loan book and added that "a lot of good people" left the agency when it merged with the National Youth Commission.
Kekana didn't want to comment on the alleged cadre deployment at the agency, but said that the UYF had been very against political pressure to lend to anyone.
He added the agency had often received calls suggesting they lend to certain people, but he said he had never budged. He had removed himself from credit decisions and made it clear to staff that if he came under any political pressure he would resign. Pillay dismissed assumptions that grants would go to politically connected people, saying that he had visited all 14 of the NYDA branches that will administer the grants and is confident that the necessary checks and balances are in place.
The decision to retain a financing option at the agency, he said, is in line with the NYDA Act 54 of 2008, which dictates that the institution provides financial assistance to young entrepreneurs. He also played down any concern that by providing grants, rather than loans or co-sharing grants, the NYDA may unintentionally spur a culture of entitlement among the youth. He said that young entrepreneurs would not be able to access a grant without a voucher for business development support and a mentor.
"The grant programme is really designed to encourage young entrepreneurs to take a chance and have a 'bite' at entrepreneurship as a means of livelihood. If you fail or realise that business is not for you, then at the very least you can start another life without having the added financial stress of loan repayments," he explained. He said business owners who succeed and then wish to expand their business can access further loans from the IDC or Sefa.
More funding, more value
The IDC and Sefa funding effectively means that R540-million a year will be available to young entrepreneurs, a whopping 15 times the R36.7-million in finance the NYDA approved to young entrepreneurs in 2011/12.
Most valuable may be the IDC's experience in lending to business owners. Minister of Economic Development Ebrahim Patel is certain it will add value. "They (the NYDA) will continue to have public funds voted by Parliament and bringing some of the business acumen of the IDC to the NYDA can only be of great help to empower young people," said Patel.
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