World Finance Crises - Impact on SMEs world wide

WORLD FINANCIAL CRISIS: IMPACT ON THE HEALTH AND SUSTENANCE OF SMEs WORLDWIDE AND ACTIONS PROPOSED

Researched by Dr Arun Agrawal, Executive Director, World Association for Small and Medium Enterprises

UK Premier promises £250bn bailout will save SMEs

Downing St has put SMEs at the centre of its bank bailout plan, but is relying on European funds and the banks' own word to deliver much needed relief to small businesses.

Chancellor Alistair Darling's £500bn bailout for the banks has been swiftly followed by action from the Bank of England, which has announced an immediate half per cent cut in interest rates, alongside identical cuts from the European Bank and the US Federal Reserve.

Prime Minister Gordon Brown, speaking recently in the House of Commons , refused to make a prediction on what will happen to the UK economy in the coming year, but said the introduction of £200bn in extra liquidity, £50bn in recapitalisation of the banks and medium-term financing of £250bn would help.
Brown said the government aimed to improve cashflow and credit availability for small and medium businesses. He promised the government would aim to settle its own payments to small and medium businesses which supply the government within ten days.

He is also proposing talking to the European Investment Bank to increase the availability of loans to small and medium businesses made through UK banks.
However, the mechanics of the plan remain a mystery. So far, all that is certain is the government has had a word with the UK's leading banks.
The Treasury believes there is no need for Parliamentary legislation for the multi-billion bailout to go ahead. The figure of £250bn in financing is thought to be a fluid one, essentially plucked from the air and liable to change as the situation changes
.
The official Treasury statement said that any capital investment in banks, "will require a full commitment to support lending to small businesses and home buyers". But no details have been provided on how this would be achieved - it will not be a question of quotas or targets. While having government officials on bank boards is not envisaged, it has not been ruled out. Discussions with leading banks have apparently reassured officials that the money will be used to increase availability of loans for small businesses and mortgage applicants.
Success or failure of the bailout will be measured in a loosening of credit for business. Brown's political future is likely also to depend on whether the effect trickles down to the real world.

Opinion of a British SME

“The credit crunch and banking crisis will have almost no effect on British SMEs because they got no financial support from the banks anyway.
Britian is a medium sized country with an Imperial sized financial infrastructure, yet, UK businesses have always found it hard to raise capital or get reasonably priced credit.

Even in the boom times a request for funding say a new software business would always be met with an "Of course you can have the money we, just need your house for security and that will be an extra two percent interest as you are self employed".

As banks are now funded by UK tax payers can we please make it ilegal for banks to give all our money to the next American con man who bamboozles them with a power point presentation”

Situation in India

Perhaps, there’s a deliberate attempt at keeping monetary conditions tight, to truly slay the inflation monster. Given that commodity prices are collapsing worldwide, and even agricultural stocks are piling up, it may be time to give up the hawkish stance on inflation. If the Reserve Bank persists with high short-term rates for too long, it’s going to hurt working capital costs. This is credit taken from banks to tide over, until the customer pays. In times of downturn, firms try to instinctively delay payments to vendors, and collect quicker from customers.

But clearly at the systemic level this is disastrous. The SME sector lacking deep pockets, suffers the worst, and a rise in working capital costs can wipe its profits. This sector contributes the bulk of industrial employment and exports, and hence needs liquidity support urgently.

Debate in European Parliament

”The financial crisis is very worrying for the economy, jobs, and for millions of people who worked hard to save and see that the fruits of their efforts are vulnerable”, said Joseph DAUL (EPP-ED, FR). “Europe must manage the crisis and learn lessons, pooling its efforts to minimise the impact on its economies and firms - particularly small and medium-sized enterprises, which need support measures”, he continued.

Liquidity Crunch in S Korea

Liquidity crunch. In South Korea, fixed rate mortgages now cost up to 10% per year; the yield on three-month certificate of deposits reached nearly 6% at the end of September. Rates might go higher. Banks appear reluctant to lend to small and medium-sized enterprises (SMEs), having focused on expanding lending to this sector over the last two years.

Domestic banks. However, bank balance sheets are far more robust than during the financial crisis in Asia ten years ago, although several have taken losses from exposure to the US markets. No substantial bank failure is anticipated, and the state, which has a large share in the sector, would anyway not allow it. Yet, despite this underlying robustness, South Korean banks are regarded as vulnerable:

Indebted households and SMEs account for a substantial share of their loans. The latter are particularly vulnerable to a slowing economy and higher input prices; the former are suffering from higher interest rates, inflation and labor market weaknesses.

The impact on Chinese SMEs – An assessment by Xinhua

Relatively limited credit risk exposure to export-driven enterprises Export-driven enterprises will be heavily affected by the impact of the global economic slowdown. Raw materials and labor costs rose significantly in the first half of 2008 and continue to remain high. In addition, weak global markets, the appreciation of the RMB, implementation of new labor laws and export tax rebate cuts have further punished export-driven SME's.

Resource intensive, labor intensive and low technology SME's have
occasionally closed down. Preliminary estimates by the NDRC indicate that around 67,000 SME's have gone bankrupt in the first half of 2008. However, due to the intrinsic high risk of SME's, the banking industry – especially large SOE banks -- historically has not focused on loans to SME's. For this reason SME's, which contribute almost 60% of China's GDP, account for less than 20% of loans made by large financial institutions. Moreover, due to a severe imbalance between supply and demand in the market, banks have greater flexibility in selecting clients. With relatively high quality clients, the banks' risk exposure to SME's is relatively small.

Development of a market driven by domestic demand will lead to SME financing becoming a business focal point Xinhua Finance believes the development of SME's will play a crucial role in terms of adjustment of the nation's economic structure, providing employment and sustainable economic development. As China's domestic demand market grows larger, SME's will be able to grow and mature through domestic market expansion, and will gradually become one of the banks' favored funding clients. As banks strengthen the use of risk pricing technology and increase risk control mechanisms, they will increase their
profit-generating ability and provide new areas for profit growth. With the
policy decision to reduce the deposit reserve ratio, the central bank wishes to increase the availability of bank loans for SME's by increasing funding liquidity of small and medium sized banks. This is consistent with the earlier policy of increasing special project loans for SME's. However, solving the financing problems of SME's requires clear positioning of the various financial markets, establishment of a SME credit guarantee fund, and enrichment and enhancement of various additional financing channels.

The World Association for Small and Medium Enterprises (WASME), founded in 1980 in New Delhi, India, is now recognised as the largest professionally managed global non-governmental organization with Members comprising of national governments, chambers of commerce and industry, small business authorities and associations, banks and financial institutions, training and consultancy agencies serving micro, small and medium enterprises, primarily in developing countries.

WASME has members and associates spreading over five continents. WASME also has a consultative /observer status with agencies of United Nations, e.g. UNIDO and finds place in International Labor Organization (ILO)'s special list of Non Governmental International organizations. Its mission is to emerge as premier international SME representative organization. Keeping with its tradition of promoting and stimulating the SMEs globally, WASME presents Legion of Honor and Special Honor Awards to member organizations which is the most coveted and highest International recognition in the small business sector.

Vice Presdent for Europe and Permanent Representative at UNIDO
Ms. Susanne Forstinger (HELVETIA INTERNATIONAL MONTRES)
A-1014 Vienna, Bujattigasse 13

WASME World Association of Small & Medium Enterprises
Representative WASME in Vienna and Alternate Representative at UNIDO:
Dr. Norbert W. Knoll v. Dornhoff
H-1026 Budapest, Garas utca. 22
Phone: +361-3151059
Press Officer:
Ágnes Czinege

This release was published on openPR.