So the problem is not only that employees cannot come to work, cannot produce and provide services. There are also other things affecting the business, like the demand side.
Indeed, all the containment measures that have been put in place to limit the spread of the virus are affecting demand. The sectors most affected by the containment measures (tourism, transport, automotive, to name a few) are the ones where demand has significantly slowed down.
So in this highly unusual situation, what kind of help do they need?
The first answer is that SMEs need support now, immediately. Clearly, the easiest way to provide a response is to offer some immediate relief in terms of liquidity—for example by extending credit holidays and grace periods for capital payments. At the same time it is also crucial to improve their access to new financial support, by providing additional working capital facilities, or liquidity lines such as factoring, and overdraft credit lines.
Essentially, these small businesses now need access to bank loans in a situation, where if a bank were to look at their business, they might not look so healthy to the bank, is that right? Because if they’re not producing at the top of their capacity, and the demand for their products might not be very high right now, they might not qualify for a typical business loan, right?
Indeed, in terms of credit quality, SMEs will face a deterioration of their credit metrics. They will be impacted in terms of profitability, revenue generation, liquidity buffers, which are all key metrics for a standard credit risk assessment.
As, it is difficult to assess if this will be a temporary symmetric shock and how long it will take to recover, it is crucial that banks continue to lend and provide financing support. Otherwise we would observe a sort of a spiraling effect, with an accelerating number of defaults.
To avoid this effect, several member states have put in place ad hoc measures, which foresee holiday periods imposed by law for capital instalments on existing loans, and public guarantees in order to incentivize banks to support SMEs.
In addition to the measures, those member states are taking nationally, how can the European Investment Bank help these businesses?
We need to focus on measures that can be implemented quickly under existing instruments, to be able to provide an immediate response, while in parallel developing also other initiatives such as risk sharing schemes with commercial banks.
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