Chile’s COVID-19 soft business loans – the key points

Chilean banks are preparing a special line of soft loans, backed by government guarantees, to companies struggling amid the COVID-19 storm.

A law establishing the line and authorizing the state to inject US$3bn into guarantee fund Fogape entered the statute books on Friday as officials draw up secondary legislation.

With the additional capital, the fund will be able to leverage up to around US$24bn in loans. The move will help give embattled companies “oxygen,” finance minister Ignacio Briones said earlier this week.

Up to 1.3mn microenterprises, SMEs and large companies will benefit, according to the ministry.

The law – which temporarily modifies legislation governing Fogape – will remain in force until April 30, 2021.

President Sebastián Piñera warned of a major risk involving a “brutal” economic crisis that would drive up bankruptcy and unemployment rates.

The government has announced measures over US$17bn, or 6.9% of 2020 GDP, to support companies and families.

How fast a country bounces back will depend on how many companies stagger out of the crisis intact as Latin America is expected to fall into a deep recession this year. Green shoots of recovery are expected next half. 

Meanwhile, the rules and regulations Chilean banks need to offer the loans should be ready in the first week of May, officials from local bank Banco Internacional said during a teleconference hosted by Chile’s construction chamber, CChC, which controls the lender via financial holding ILC.

Banks are also preparing a monitoring system to help ensure firms do not obtain several of the soft loans from different lenders.

Prospective borrowers were urged to start getting documents such as financial statements together and to first approach the banks they regularly use. 

WHAT ARE THE PREREQUISITES?

The business must have been in good financial health prior to the outbreak and annual sales cannot exceed around US$32mn.

Credit history must fall within certain parameters and the business must not be subject to judicial proceedings. Banks will also apply their own risk criteria when making a loan decision.

Many SMEs in Chile were already struggling following the social unrest of 4Q19, as vandalism, arson and an associated plunge in sales took its toll.

HOW MUCH CAN A COMPANY BORROW?

The equivalent of three months of sales maximum.

The government will guarantee up to 85% of the amount borrowed, depending on borrower size.

WHAT ARE THE TERMS?

Loans will bear an interest rate of the central bank’s benchmark rate (currently 0.5%) plus a maximum of 3%.

Borrowers will have a six-month grace period and 24-48 months to repay.

HOW CAN THE LOANS BE USED?

The so-called COVID-19 loans can be used only for working capital purposes, like paying wages, suppliers, tax or rent, for example, but not for paying off debts or investing in real estate or other fixed assets. 

Héctor Neira, risk manager at Banco Internacional, told the conference, “it has a very restricted use…basically providing companies with the liquidity they need in order to continue operating.” 

Borrowers will have to sign legal documents confirming how they will use the loans.

Banks are working on a reporting system to track which companies have been awarded loans, the teleconference was told.