A meeting organised by a group of owners of small and medium-sized enterprises (SMEs) with the specific agenda of posting me on new and not so new problems related to government bureaucracy, went down another road. It ended up in a discussion on an equally serious hurdle encountered by these entrepreneurs in their endeavour to keep their businesses afloat: the present approach of some banks.
While acknowledging that this recession is not the result of the normal cyclicality of economic activity - where the banking sector remains strong and can provide cheaper credit to stimulate investment for sustainable economic growth - and that this time it was the banking crisis that led the general economy into a recession, what economic sense does it make to go to the other extreme by making credit so expensive and difficult?
Some businesses are in a really bad state. So what's new, I can hear you ask. But when one comes closer to the realities of these businesses, one is able to learn and understand their predicament better. They have fewer assets and smaller cushions of retained earnings than big companies. They often depend on a smaller client base and they are unable to spread business risk by, for instance, operating across several product lines.
Along with falling demand, they are facing an exceptional shortage of bank credit. The problem is being compounded by pressures from banks in general. While elsewhere we see banks reducing interest rates, here the opposite is happening. The European Central Bank and our own Central Bank speak of lower rates, but the commercial banks ignore this and go for the pound of flesh in the form of the additional one per cent or so.
Some businesses could adapt to lower sales volume for a period if they could still get the working capital they need to, for instance, pay suppliers, until their customers pay them, but now banks are cutting their line of credit. For others, interest rates are raised even above those charged before the downturn began. The explanation given by the banks is that credit has become costlier.
In this scenario, the banks do not want their fate to be sealed by the sort of bankruptcy resulting from their debtors not paying them back. So for this reason, banks are over-cautious and strive to consolidate their funds by squeezing out the credit and increasing the repayment of capital.
If this persists, it would end up a vicious circle, as the firms in question wouldn't have any capital to enhance their productivity or market reaching capacity. This would mean further loss or shut down for the enterprise and lay-offs, creating the very sense of pessimism in the market that, in the first place, makes the banks act in the way they are acting now.
To help get out of this, there has to be increased market credit availability for SMEs for further investment and market realisation. As things stand now, there are entrepreneurs who are going out of business, generating more unemployment, all driving down the economy, all creating more bad debts. This is obviously also bad for the banking system.
But still, banks continue trying to cut back their line of credit coming back to these business people with rates way over what they paid before and ludicrous arrangement fees. It's as though the banks are believing that many businesses are going to collapse even though some of the entrepreneurs speaking at the meeting are reasonably stable. They explained how most of the time they are trying to negotiate new agreements with the bank, living day by day waiting to be given new overdrafts on terms they can live with.
It is certainly the time for the government to be proactive on the problems being faced by SMEs, first by trying harder at easing the bureaucracy channel, which continues to stifle the sector. And secondly, by discussing with the banks ways in which these businesses can be helped not least to avoid further unemployment and to help the economy in general. These enterprises need oxygen now and not some scheme the benefit of which will be felt in a year's time. Immediate action needs to be taken as time is of the essence.
The experience of the entrepreneurs at the meeting is that the government does not recognise that they are the risk-takers who keep a good part of the economy going. The present economic downturn has been deep and sudden and thus, unplanned for, so a little help from the government and the banks may mean the rescue of some firms and jobs.
Dr Dalli is shadow minister for the public service and government investments.