I REFER to your report Mustapa: At least six months needed for country’s economy to recover on March 30, in which Minister in the Prime Minister's Department (Economy) Datuk Seri Mustapa Mohamed alluded to the fact that small and medium-sized entreprenuers (SMEs) claimed they were not directly subsidised under the economic stimulus packages (Prihatin). "But the government is always open to them as they represent over 60% in the workforce, ” he said.
Allow me to share some ideas, but before that, let's identify a key issue facing SMEs, understand the peculiarities of the impending economic depression and role of banks.
The problem with SMEs: Working capital is the lifeline of any SME. It represents the assets that can be quickly turned into cash to run a business, namely pay for inventory, equipment and salaries of staff.
In an economic downturn, SMEs typically feel the pinch far before the large private and public-owned companies that normally hold on to some cash in their balance sheets. They struggle with matching receivables, i.e. money owned by other businesses in the supply chain, against the payables on the liabilities side of the balance sheet.
Payables are what SMEs owe to their suppliers. This relationship between receivables and payables is the biggest threat facing SMEs in a financial crisis and the supply chains associated with them.
Although there appear to be similarities between the 2008-2009 financial crisis and the current financial fallout, i.e. freefall of asset prices and tightening of credit lines, there is one major distinction between both events. In the earlier crisis, we witnessed over-leveraged lenders at its epicentre. Central banks, with their tool kits, had the firepower to alleviate stress by either directly funding the failing banks or by buying assets in the open market.
However, the current crisis differs as the banking system is only one part of the affected economy. Other funding markets, such as the bond market, are also reeling from the onslaught of the crisis.
We are witnessing a rout in market-based finance. This is where banks must chip in to deliver their quasi-public responsibility.
Banks have a moral obligation to help SMEs and the community at large weather this storm. As financial intermediaries, they help determine the supply of money in circulation by giving out loans. In addition, they also buy and sell money to the central bank through the money market. This money is then distributed in the economy through loans and incentives or, conversely, kept in the reserves to prevent inflation from spiraling upwards.
Banking measures: Bank Negara Malaysia must be commended for rolling out a swath of credit lines across the spectrum of SMEs and a loan deferment programme. To complement these measures, we may also learn from the practices and experiences of other countries, namely:
> Israel, which is particularly focused on speeding up the time taken for banks to provide credit;
> Austria, Japan and South Korea, which have introduced new public guarantees;
> South Korea, which is is providing insurance on receivables; and
> France, which is providing credit mediation for SMEs wanting to renegotiate credit terms.
(Source: Covid-19: SME Policy Responses, March 16,2020, OECD Center for Entrepreneurship, Regions, SMEs and Cities)
Against this background, SMEs with profits last year should be incentivised with interest-free or near-zero interest loans, with government guarantees equivalent to the amount of taxes paid last year. Simple evidence of tax filing documents can be provided to the banks and can be verified at random with the Inland Revenue Board of Malaysia. The Finance Ministry must chip in with the guarantee. To prevent abuse, only profitable SMEs are eligible.
Lessons learnt from the 2008-2009 global financial crisis resulted in more restraining regulations and supervisory tools imposed on banks and their lending programmes. It is now time to allow the banks to draw down their accumulated balance sheet buffers and beef up lending capacity.
To ensure that funds are effectively channelled to the deserving segments of society and SMEs, the Government must ban dividend payments and share buybacks by the banks’ shareholders. This principle also applies to all companies whose balance sheets are threatened by this crisis.
Taking the lead in this sphere is the European Central Bank, which recently instructed banks to cancel all measures to return funds to shareholders. Such a move will free up additional capital to support lending.
Again, the banking sector is already in a healthier and stronger position than it was during the 2008-2009 crisis. Leverage is lower and capital ratios are higher.
These measures, if quickly implemented, will provide many distressed SMEs out there with a lifeline to ride through the financial storm ahead.
PING YEAN CHEAH
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