Take 1,000 from us and repay just 999: For the first time in Israel’s history, the Bank of Israel will be making loans to commercial banks at a negative interest rates so long as they agree to re-lend the money to small and micro businesses.
The central bank said on Thursday that it would provide 10 billion shekels ($3 billion) at a rate of minus 0.1% on the loans on condition that the loans they make with it do not exceed the prime rate plus 1.3 percentage point – which right now comes to a rate of 2.9%.
In fact, it’s a 10 billion-shekel gift to the banks assuming they make the credit available to the target group. The problem is that it is reasonable to assume that some of the borrowers will not be able to repay the loan and the gift will be somewhat less than 10 billion.
The negative interest loan was announced at the same time that the Bank of Israel said it was leaving its base lending rate at 0.1% for the fourth straight time. The central bank said it was also adding 35 billion shekels to a 50 billion-shekel program launched in March to buy government bonds on the secondary market.
Beside setting a historical precedent, the negative interest loans are a creative solution to provide liquidity to the sector of the economy that’s in the most serious trouble right now. If small businesses fail, the impact will be felt across the job market.
However, the banks are not terribly enthusiastic about the new loan plan. As they see it, the problem remains that it’s not at all clear how many small businesses will be able to repay the principal on loans no matter what the format. With the current lockdown still keeping many businesses shut and hurting the business of those that are open, the risk factor is huge. And that is without even taking into account the risk of future lockdowns.
From the outset of the coronavirus crisis, the government and the Bank of Israel devised several tools to help businesses cope, among them grants and state-backed loans. However, the programs focused on business borrowers who are managing well despite the crisis. Those who needed loans the most, such as businesses struggling before the pandemic, couldn’t get them.
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In response, the government set up a 4 billion-shekel fund for high-risk business borrowers, defined as those whose turnover had fallen by at least 50%. The loans were 60% government guaranteed.
So far, about a third of the 4 billion shekels has been lent out. Business owners say the banks have raised all kinds of obstacles to getting loans from the fund. As a result, the Knesset Finance Committee, chaired by Moshe Gafni (United Torah Judaism), is calling the bank heads and officials at the Bank of Israel to get an explanation.
The banks say in their defense that many borrowers haven’t been able to provide enough information on their businesses’ current operations or their ability to turn them around with the help of a loan. They warn that in many cases loans won’t help the borrowers and the money will go down the drain.
The Bank of Israel’s negative interest loan program is designed to encourage the banks to open the spigot to the smallest businesses by reducing the rate of interest they have to pay.
According to the Finance Ministry accountant general, government loan funds are drawn on more often by small businesses than by large ones. In September, 98% of the 18 billion shekels allocated for small businesses had been used versus 27% of the 53 billion shekels allocated for big business.
The figures show that small businesses are far more in need of loans than bigger enterprises, which can draw from a variety of other programs, such as outright grants from the state, discounts on municipal tax rates and subsidies for taking back workers on unpaid leave.
The new Bank of Israel program is designed to reduce the risk of lending to the smallest businesses. It also provides a channel for the central bank to lower lending rates albeit only to those who are at risk of failing without a loan.