The National Empowerment Fund has once again thrown open its doors to would-be investors after halting the granting of any loans for a year.
The government-mandated development financier announced that R950-million will immediately be made available for loans to black-owned and -managed businesses.
The NEF anticipates receiving another R2.3-billion from the national treasury over the next three years, and a possible R1-billion through a “loan facility” from the development finance sector.
“In May 2013 the NEF was compelled by declining resources and unrealised recapitalisation initiatives to declare a temporary moratorium [on the granting of loans],” said Rakesh Garach, the recently appointed acting chairperson of the NEF’s board of trustees.
“Now that we are confident and certain that new capital is on the horizon, the NEF is comfortable to reopen funding for new transactions to meet the huge demand for development finance by black business.”
The almost R1-billion that will be made available will be drawn from the uncommitted portion of the R1.48-billion cash that the fund reflected at the end of its March financial year.
The NEF would not disclose details about the loan facility that will en-able it to source further liquidity, saying only that it is being brokered by the department of trade and industry and the treasury. Talks are at an “advanced stage”.
In terms of the Public Finance Management Act, the NEF is currently prohibited from acquiring private funding from the market.
However, the fund has applied through the national treasury to be “reclassified” under the Act. If the reclassification is granted, the NEF will be able to canvass private investors and borrow money from the commercial sector, to keep advancing loans. This will possibly mean a larger pool of successful loan recipients, but may result in higher costs of lending for those who qualify.
“If the NEF were to go out and borrow money to capitalise itself, then there would be a marginal cost that would unfortunately be passed on to the investees,” said Moemise Motsepe, the NEF’s head of marketing and communications.
But the fund will simultaneously need to keep a close eye on its level of bad debt, which has soared to about 20% of its loans in the past few years.
In 2012 the fund disbursed R393-million in loans and wrote off R109-million to bad debt. In 2011 it advanced R210-million and wrote off R92-million.
When the NEF announced its funding moratorium last year, 70% of its long-term loans were still outstanding. “We always aim to collect all our loans; however, it must be noted that the average impairment provision trend to date is about 20%,” said chief executive of the NEF, Philisiwe Mthethwa.
But the high level of write-offs is “reflective of the adverse economic conditions experienced in the country and worldwide”, said Motsepe. “Before the 2008 economic downturn, it was better. Some years were as low as 14% or 11%, but it shot up.”
The NEF is positioned as a “patient capital lender”, meaning that investees can take up to seven years to pay back their loans, and rural and industrial development investees are granted up to 10 years to repay. The fund also allowed for a “repayment holiday” during the recession.
As a development financier, the NEF also typically funds higher-risk operations than the average commercial lender would.
The result is that the NEF’s capital has waned significantly over the years, having initially received funding injections from the national treasury between 2005 and 2010, but nothing since then. It aims to decrease its bad debt write-offs by 1% each year for the medium term, hoping to reach 19% at the end of the current financial year, and 17% by the end of the 2017-2018 financial year.