Utkarsh Agrawal

014
MBA 2nd year

COVID-19 impact on SME Banking.

I have categorized impact in 3 categories.

1. Short Term- Major
2. Short Term- Minor
3. Long Term

These are the Short Term- Major impacts:

 Cash flow crunch. With the debtors, not being able to pay their due loans due to loss
of business this will lead to cash flow getting dried up for SMEs.
 Inability to pay salaries. Due to a Cash Flow crunch SMEs with low cash reserves will
have to delay or cut down on salaries given to staff. In some more serious cases even
layoffs.
 SMEs make investments of their own in many financial instruments. Because of a
crash in markets these have lost a lot of value in the short run.
 Reduction in loan rates due to enhance liquidity by the government can prompt
many debtors to re-finance their loans which in the short run is not beneficial for the
company.

These are the Short Term- Minor impacts:

 No new client generation. As the economy world over is in lockdown generating new
clients will be challenging.
 Reduction in working capital. May lead to disruption in day to day activites.
 Delay of payment to creditors. May lead to a friction in relationships
 A risk of virus infecting an employee can lead to complete shutdown of activities and
also reduce prospects of any new business.

These are the Long-Term impacts:

 If certain businesses to which the SME has loaned considerable amount gets
permanently shut off due to the pressure of the virus that loan will become NPA
adding a significant provisional pressure on the balance sheet.
 SMEs with low cash balance will lose out on talent as they cannot pay and the same
will join competitors or other industries and will ultimately lead to an increase in
competition
 Investments made in risky assets may not pay up even in the long run which will
further add pressure to the companies’ asset quality
 A reduction in base rate by the RBI make conventional banking more attractive in
these scenarios and a replication of rate reduction by the SME may lead to erosion of
 margins which adds further pressure on the sector to loan more aggressively and
potentially increase the risk quotient
 The liquidity in such cases that will be made available by the central bank may be
swallowed up by conventional banks.
 Trust factor of the public may shift towards conventional banking if too many SMEs
are shut due to non-recovery from this current crisis.
 The current crisis may lead to shutdowns as mentioned previously and that would
further prompt the RBI to make more stringent rules for new SMEs to come up.
 This will lead to a drying up of liquidity in the SME space
 This will make the sector incompetent when compared to other sectors

Over all the impact of this virus will lead to many SMEs perishing under pressure but will
teach many enduring lessons to the sector and the economy as a whole.
One major lesson that all are learning as of now is to always have sufficient cash
reserves to ensure day to day ops in times of crisis.