SMEs needs targeted support in light of Coronavirus: Helene Rey, London Business School

February 29, 2020 4:30 AM

It is not the best time to forecast this situation because it largely depends on the virus propagation and I don’t have any special insight.

sme, sme sectorCredit growth is low, because your banks are not lending, says Helene Rey

India needs to give targeted support to small and medium enterprises (SME), which are losing out on trade due to coronavirus in China, Helene Rey, professor of economics, London Business School tells Ankur Mishra and Urvashi Valecha in an interview. Speaking on weak loan growth problem in India, Rey, who was in Mumbai to deliver a lecture on EXIM Bank Commencement Day, said only banks with healthy balance sheets can lead to credit growth. Edited excerpts:

In your assessment, what will be impact of coronavirus on global markets and particularly in India?

It is not the best time to forecast this situation because it largely depends on the virus propagation and I don’t have any special insight. The effect will be dependent on how fast China goes back to work. If they go back to work quickly, then effect on the global supply chain will be mitigated. Otherwise it will be hurting all the importers. So for India, imported items like electronics,electrical components, as well as textile from China will affect the small and medium businesses that form quite a part of the economy.This is where you need some targeted support for small and medium enterprises (SMEs) as you need them not to go bankrupt because of this shock. If these businesses have to shut down, it can lead to a macro effect. That is why we have to provide as much support to these industries, which don’t have the balance sheet to resist the impact or coronavirus.

What impact of coronavirus do you see on currency?

Usually when there is a big problem in the world economy or a lot of uncertainty there tends to be flight to the dollar and that means some downward pressure on the number of currencies which may not be a bad thing unless you have a dollar debt. If you have a lot of dollar debt and your currency depreciates, you have to repay your debt in dollar, it depends a lot on your external position and lot on your balance sheet. There will be some depreciation of a lot of currencies but, it is not unusual.

The credit growth of banks in India has plunged to two year low. What steps do you think RBI and the government should take to fix the issue?

Credit growth is low, because your banks are not lending.The right policy is to fix the non-performing loan problems wherever they are, and I have no information about where they are. Only banks with healthy balance sheets can lead to credit growth. Then there are global forces which are problematic for everyone. I am not an expert on structural reforms but there seem to be some structural reforms that need to be made in India.

Do you believe LTROs introduced by RBI will yield result, like it did in other parts of the world?

The transmission mechanisms need to work, so if the lending rates don’t go down and if the balance sheets are bad, or if there are too many non-performing loans then the banks cannot lend essentially.

Capital flows have remained robust into emerging markets thanks to quantitative easing over the last few years, do you expect this to continue?

Given that the economy is not doing too well, it is hard to think of monetary policy tightening. It is going to be a loose monetary policy for a while and there is going to be a lot of Brexit related issues, so the likes of central banks such as Bank of England will not be too hawkish.

What are the measures that central banks have at their disposal to combat a slowdown?

Central Banks have been constantly innovating for a while now. In the European Union (EU) area, we have very specific types of quantitative easing (QE) such as long-term repo operations (LTRO). Right now, the support in Hong Kong and Singapore comes from ‘helicopter drop’ that is also a new thing and targeted support. We are potentially going to see more of such move.

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