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Some SMEs will continue to need liquidity finance – Central Bank

13 Dec 2021 / COVID-19 Print

Some SMEs will continue to need liquidity finance

A Central Bank paper examining the impact of COVID-19 on borrowers and businesses finds a clear distinction between pre-pandemic distress and the temporary distress incurred in 2020.

More specifically, it finds that the majority of firms that are expected to remain distressed at the end of the scenario window are those that were distressed before the start of the pandemic.

This is a cohort of 5-6% of SMEs, the regulator has said.

Due to the strength of the forecasted recovery and the design of support policies, finds that the withdrawal of Government supports will not adversely affect a large cohort of firms.

Sustained loss-making

However, in the event of a partial recovery only, sustained loss-making may, over time, lead to elevated levels of distress in certain SME sectors such as the retail and hospitality sectors.

The paper titled, ‘Behind the Data’, by Stephen Sweeney and Allan Kearns, looks at loans granted forbearance between December 2020 and September 2021. It finds that retail banks issued forbearance to borrowers on €4.7 billion of loans during this period, 79% of which was to businesses.

This represented 12% and 10% of banks’ outstanding corporate and SME loans, respectively.

Sectoral data show that the crisis has mostly affected the real estate, accommodation-and-food service, and arts, entertainment, and recreation sectors. These account for 83% of forbearance granted to businesses during the period.

The data indicates that some borrowers, who had initially returned to the original repayment schedule following a payment break, have subsequently needed new forbearance supports in 2021.  

Other research finds that financial distress among firms is expected to fall from a peak of 12% in 2020 to 7% by 2024.

It further finds that, in the absence of direct Government financial supports, 15% of firms would have been financially distressed during the pandemic – and potentially up to 30% – if SMEs had been obliged to meet all operating losses using only pre-existing cash balances.

The paper notes that the SME sector is vulnerable to any change in the availability of external financing.

Bridging function

This would provide an important bridging function as viable SMEs continue to require temporary liquidity support during the recovery.

Should there be a tightening of external financing, the research suggests that financial distress in 2024 could increase from 7% to 13%.

This finding highlights the importance of an adequate provision of liquidity financing from lenders to ensure that viable, but challenged, SMEs can trade through the recovery from the unprecedented shock related to the pandemic. 

Central Bank Deputy Governor Sharon Donnery said: “The research published today (13 December) underlines the scale of the difficulties faced by businesses and borrowers during the COVID-19 pandemic.

Uncertain outlook

“While there are signs of economic recovery, the current outlook – as evidenced by the emergence of the Omicron variant – reinforces the fact that significant uncertainties remain.

“The issue of distressed debt remains a key focus for the Central Bank. We expect regulated firms to continue to support viable businesses and borrowers through the challenges posed by COVID-19.”

Donnery added that the survival of viable businesses, which have faced challenges during the pandemic, is critical for employment and the overall health of the economy. 

“We encourage any borrower experiencing financial difficulty to engage with their lender as early as possible,” she said.

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