Why KfW loans do not help affected industries in the crisis: Planned changes to the KfW lending guidelines
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Why KfW loans do not help affected industries in the crisis: Planned changes to the KfW lending guidelines

In order to help small and medium-sized enterprises through the crisis, the German government decided to help with loans. But the proposed measures apparently do not work in many cases. We analyse why KfW loans do not help affected industries in the crisis.

The Kreditanstalt für Wiederaufbau (KfW) increased the assumption of risk up to 90 percent – the residual risk is borne by the respective house bank. The house bank must, however, proceed with its usual credit review process, in which the repayment of the total amount must be probable in a forecasted calculation. Here lies the problem for many companies. They still do not qualify for any loans.

Why KfW loans do not help affected sectors in the crisis

Although numerous companies apply for loans, many house banks will not be able to approve many loans, despite the 90 percent assumption of risk by the KfW.

Crucial point is the wording according to which only companies that can repay the loan within five years qualify for the loans. This hurdle is probably too high for many of the affected companies.

Heavily affected industries have little chance of obtaining loans

Companies from the tourism, transport, travel or logistics industry are particularly hard hit. These industries live primarily on current sales, while their margins are relatively low.

In contrast to companies in the manufacturing sector, it takes more time than the five years stipulated in the plan to build up sufficient reserves to repay the loans. Therefore, the house bank may not grant the loan.

No loan despite sufficient business model

As a result, affected companies lose out, despite the decided aid measures. The fact that they can demonstrate business models that will in all probability work again after the crisis does not help them.

However, in contrast to manufacturing industries, these companies can hardly make up the lost sales. While in some places production can be ramped up at short notice to meet increased demand, hotels and restaurants are unable to make up for lost sales during the Easter holidays. Hotel beds can only be rented out once a night and dinner can only be served once a night.

Extension of the exemption from liability to 100 percent

Following fierce criticism from trade associations for avoiding a wave of bankruptcies, there are now plans to increase the exemption from liability to 100 percent. In this case, the house bank would no longer be liable at all loans granted. The EU Commission must agree to this change. The discussions are still ongoing.

Our assessment

The planned measure is another sensible step in the right direction. The house banks will naturally find it much easier to grant loans with the full release from liability. However, this expansion alone will not be enough.

The lending guidelines also need to be changed, as many of the hard hit companies will not be able to repay the loans within a period of five years.

At a later stage, it would also be useful to consider, on a case-by-case basis, waiving parts of these loans when entrepreneurs are particularly hard hit.

We will of course keep you informed about developments. We expect to have more detailed information available shortly. Our team is available to answer your questions at any time.

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