Insight - Imperative to drive recovery of SMEs


  • SME
  • Friday, 05 Jun 2020

Bank Negara has been quick to respond to the crisis by announcing a moratorium on loans and enhancing financing facilities available under its Funds for SMEs; including an increase in the Special Relief Facility (SRF) to RM5bil and lowering the maximum financing rate to 3.5%.

The Covid-19 pandemic has induced the twin crises of a public health emergency and an economic recession. With Malaysians still living under the conditional movement control order (CMCO), we are enduring an unprecedented period of economic inertia.

This slowdown also threatens to trigger a liquidity crisis as businesses experience severe cash flow constraints.

SMEs are especially vulnerable to economic shocks and as such require a clear recovery plan to minimise the impact of the outbreak.

In view of this bearish outlook, we need a concerted response from all stakeholders to drive the recovery of SMEs.

To support the government’s stimulus package, financial institutions need to ensure that SMEs continue to gain access to cheap credit.

Bank Negara has been quick to respond to the crisis by announcing a moratorium on loans and enhancing financing facilities available under its Funds for SMEs; including an increase in the Special Relief Facility (SRF) to RM5bil and lowering the maximum financing rate to 3.5%.

Nonetheless, given the critical level of financial distress faced by most SMEs, the dedicated SRF has been insufficient in meeting the overwhelming demand for liquidity.

Since small and medium enterprises make up 98.5% of all businesses in Malaysia, banks should consider extending more funds to these SMEs to provide a more accommodative monetary environment to support a robust recovery.

Large Malaysian corporates also play an important role in driving the recovery of SMEs.

First, corporates should expedite the settlement of bills to suppliers to facilitate a steady flow of liquidity in the economy.

Given that many SMEs are currently cash-strapped, they need quicker repayments to invest in working capital to sustain operations.

Accelerating bill payments effectively improves the cash positions of suppliers by shortening the cash conversion cycle of these SMEs.

Also, it could potentially set off a chain reaction of payments down the value-chain, thus preventing the economy from slipping into a deep recession.

In addition, corporates should consider lengthening the credit period for SME clients that are experiencing liquidity shortages.

While it may seem prudent to demand swift payments from customers at this point, a short payment collection period may further exacerbate the current crisis and place struggling SMEs under financial distress.

Thus, where appropriate, enforcing a flexible payment collection scheme is not only an act of solidarity during this difficult period, but it can also significantly reduce the default risk of vulnerable business clients.

Given the interdependence inherent in the buyer-supplier relationship, it is crucial that business partners work together to reinvigorate disrupted supply chains.

Besides, businesses should invest today in future growth opportunities. Entrepreneurs that are brave enough to accelerate investments today are likely to gain a competitive advantage over competitors and would be in the best position to capitalise on the next wave of growth.

Thus, investment activities planned for later in the year ought to be brought forward as part of a company’s recovery strategy to remain resilient, particularly in countercyclical sectors.

An area of focus should be accelerating the digitalisation of businesses. It is evident that the Covid-19 outbreak has taught many businesses the importance of having a strong online presence.

Moreover, the digitalisation of businesses would foster growth in Malaysia’s booming e-commerce sector.

Finally, SMEs should consider running promotional activities to encourage consumer spending.

Aside from clearing out inventory, attractive promotions help with cash flow generation at a time when cash reserves are running dry.

While discount may compress profitability in the short run, businesses would at least be on a recovery path much sooner by running such promotional campaigns.

The act of clearing and restocking inventory would also, in effect, restart Malaysia’s macroeconomic recovery by encouraging consumer spending and boosting production activity.

While the CMCO is expected to be lifted on June 9, uncertainty surrounding the depth of Malaysia’s economic slowdown will continue to persist.

As such, public and private sectors need to respond decisively to support the recovery of our businesses.

Brahmal Vasudevan is the founder and chief executive officer of private equity firm Creador. The views expressed here are the writer’s own.

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Recovery , SMEs , Bank Negara , loans , financing , facilities ,

   

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