Lee Chang-yong IMF Director: "Asia Needs Bridge Loans to Support SME Financing"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] To recover from the novel coronavirus disease (COVID-19), Asian countries must devise measures to ensure cash liquidity for small and medium-sized enterprises (SMEs), emphasized Lee Chang-yong, Director of the Asia-Pacific Department at the International Monetary Fund (IMF), on the 23rd (local time).

Director Lee and Kenneth Kang, IMF Deputy Director for Asia-Pacific, stated this in a blog post titled "Expanding Lifelines to SMEs" on the IMF blog that day. He noted that in the early stages of COVID-19, Asian countries experienced a situation where households and businesses simultaneously halted activities abruptly, and that governments and central banks responded swiftly.

Director Lee and Deputy Director Kang said, "Despite such assistance, companies may be facing a new and more dangerous phase called 'economic deleveraging,' where they struggle with debt repayment and wage payments due to sudden cash liquidity deterioration and credit crunch." They pointed out that SMEs tend to have less cash reserves, more borrowings, and rely on short-term loans compared to large corporations, leaving them with fewer alternatives to secure funds and thus suffering from cash liquidity shortages.

In particular, banks are supposed to play a key role in supplying industrial capital, but since large corporations are securing cash reserves, banks themselves are under pressure and inevitably prioritize large corporations over SMEs, according to their analysis. Accordingly, while the countermeasures introduced by Asian countries are helpful, they are insufficient to save SMEs, emphasizing the need for temporary measures.

The solution they proposed is the "Working Capital Bridge Loan." They explained, "It is essential to maintain employment and wages and prevent the economy from suffering permanent damage and falling into a long-term downturn," adding, "In this unprecedented shock phase, only the public sector has the means to expand such lifelines."

IMF Blog Capture

Director Lee and Deputy Director Kang suggested that the best way to operate this is for the government to establish a Special Purpose Vehicle (SPV) to temporarily act as a public entity that provides new working capital loans to SMEs. Eligible companies for loans should have been sound until last year but affected by revenue declines due to COVID-19, and under the condition of maintaining employment, they would apply to banks for a three-year loan capable of covering working capital.

They said, "From the public side, the central bank would supply funds to the SPV, which would purchase the working capital loans provided by banks, allowing banks to have room to extend additional loans," and expected that the government's initial equity investment would protect against some losses. They added, "This idea can be easily applied to bank-centered economies but could also be expanded to more developed capital markets like those in Japan and Korea."

This content was produced with the assistance of AI translation services.