Has previous loan rejection scarred firms from applying for loans during Covid-19?

The concept of the ‘discouraged’ borrower is well documented. In this paper, we consider whether smaller firms in the UK who have been previously rejected for bank loans have been scarred by the experience so badly that even in the presence of two exceptionally generous Covid-19 loan guarantee schemes, they still refuse to make an application. Furthermore, we also consider what happens when they do. As banks have either zero or minimal loss exposure, do they still maintain their normal strict lending protocols or do they relax their standards to fulfil the governments’ objective of supporting struggling businesses through the crisis? Our findings show that 72% of previously rejected borrowers are reluctant to request loans. We find some evidence that previously scarred firms faced such severe liquidity problems that they relaxed their distrust of banks during the Covid-19 crisis. However, their share of the government-guaranteed loan portfolio was slightly lower suggesting that banks were treating each new loan application on its merits. Plain English Summary The Covid-19 crisis hit smaller businesses so hard that even previously rejected borrowers were forced to apply for loans to keep them afloat. Previous loan rejections have not discouraged small businesses in the UK in applying for Covid-19 government-guaranteed loans. Banks have used the loan guarantee schemes to continue to supply loans to small business during the pandemic. Our paper analyses the important phenomenon of borrower scarring and discouragement, when potential debtors are self-excluded from the lending market because they have previous rejections or expect a negative bank response. We consider around 45,000 UK small businesses from 2018 to 2020. On the demand side, we find that the economic shock for small businesses during the pandemic dissipates the scarring effect. Specifically, we find that micro and small businesses had the highest loan demand in the first two quarters of the pandemic (from March 2020). On the supply side, we show that scarred borrowers were not routed onto Covid-19 government-guaranteed loan schemes. These findings show the importance of government-backed lending schemes for small businesses during crisis period.

Empirical Evidence of Risks of Public-Loan Finance: Comparison between Self-Employers and SMEs

Public financial loans are very complex. However, previous research has largely neglected the effective management of public funds. More specifically, how to maintain the optimal balance between small businesses and loan providers for managing public funds over time remains unclear. Moreover, little is known about how public funds should be managed to increase survival periods, which are directly related to these institutions’ financial stability. This study tests the difference between public fund borrowers and providers from perspectives on their long-term survival and compares survival periods using 499,554 guaranteed loans. The findings show that 85% guarantee ratios and high credit ratings help increase survival periods. The findings also show that individual-based borrowers, such as self-employers, have a strong tendency to survive much longer than SMEs. Finally, our study extends the literature by offering a risk theory perspective on public financial institutions that explains how guarantee ratios and credit ratings affect the survival periods of borrowers, resulting in these institutions’ financial soundness.

Additionality of government guaranteed loans for SMEs in Israel

The study examines the Israeli Government Loans for SMEs in 2015. Our findings are based on three surveys. A business survey of 384 businesses that were granted a Government loan, a business survey of 99 businesses that were granted loans but decided not to take them and a survey of 50 loan consultants who advised those businesses about their eligibility and the Terms and Conditions of the loans. We tested Loan Adjusted Additionality and Loan Baseline Additionality and found that 53% of loans taken from the Government Loans Foundation (GLF) are additional loans. SMEs would not have taken a loan, or any part of one, if not for the Government Loans Foundation Scheme. Our contribution to the literature is by including Indirect Additionality, demonstrating the importance of the GLF Scheme, not only by assisting SMEs in their financial planning and growth but also, by signalling early stage business resilience, reducing the risks for commercial banks through regulated, financial due diligence. This outcome expands the pool of SMEs which have access to free market loans and has the potential to improve their survival rate, thus fostering economic growth.

COVID-19: guaranteed Loans and Zombie Firms

Based on a survey (7–13 April 2020) we evaluate the reaction of Swiss firms towards the COVID-19 crisis. Firms show little pro-active reactions towards the crisis, but decrease their business activities. The firms in the survey report that the decline in foreign demand is the single most important reason for their deteriorating business situation. Firms that faced a more difficult business situation before the crisis are affected more severely during the crisis. Moreover, we investigate the impact of the Swiss federal loan program (Bundeshilfe) on the business activities. To this end, we develop a stylized theoretical model of financially constrained heterogeneous firms. We find that policy makers face a trade-off between immediate higher unemployment rates and long-term higher public spending. The former arises from a combination of a too strong economic impact of the COVID-19 lockdown (demand drop) and too low levels of loans provided. Nevertheless, providing (too) high levels of loans to firms creates zombie firms that are going to default in the future leading to an increase in public spending. (JEL codes: D22, D25, D84, and G33)

AKSESIBILITAS LEMBAGA PEMBIAYAAN FORMAL UNTUK PELAKU USAHA MIKRO PENGOLAHAN IKAN DI KABUPATEN GRESIK

Kelompok usaha mikro merupakan bagian dari masyarakat Indonesia yang sampai dengan saat ini masih menemukan kesulitan dalam mengakses pinjaman dari lembaga pembiayaan. Lembaga pembiayaan formal khususnya masih memegang ketentuan yang belum mampu mereka jangkau. Namun tidak demikian bagi kelompok usaha di desa yang sebagian besar adalah menekuni bidang perikanan di Desa Gumeng, Kec. Bungah Kabupaten Gresik. Penelitian yang dilakukan pada bulan April tahun 2018 tujuan untuk a) mendeskripsikan karakteristik usaha mikro pengolahan ikan; b) menganalisis kendala dan tantangan akses permodalan formal yang sesuai kebutuhan usaha, serta c) menganalisis akses permodalan sesuai kebutuhan usaha, kinerja, dan perspektif kelembagaan pembiayaan formal ke depan. Metode penelitian yang digunakan adalah kualitatif dengan cara melakukan wawancara mendalam (indepth interview) kepada informan kunci (key person) yaitu Dinas Kelautan dan Perikanan, ketua kelompok usaha mikro, serta petugas lembaga pembiayaan formal. Data dianalisis secara deskriptif dengan menggambarkan kinerja usaha pengolahan mikro dan pola pembiayaan lembaga formal yang dapat diakses oleh kelompok usaha mikro di Desa Gumeng, Kecamatan Bungah, Kabupaten Gresik. Hasil penelitian menunjukkan bahwa kinerja usaha pengolahan mikro layak dikembangkan. Pelaku usaha khususnya pada pengolahan ikan, telah menjalin kerjasama dengan lembaga pembiayaan formal yang menjembatani usaha mereka. Sebagai opsi rekomendasi mengenai pola pembiayaan yang memudahkan bagi debitur, maupun lembaga pembiayaan itu sendiri adalah lembaga pembiayaan formal yang menawarkan kemudahan sebagai berikut: a) tidak mensyaratkan calon peminjam modal usaha dengan sebuah jaminan; b) lembaga pembiayaan memberikan edukasi berupa pelatihan tata cara pengelolaan dana usaha. Petugas lembaga pembiayaan formal dapat memantau sekaligus memberi masukan pada pola usaha yang dilakukan debitur dengan harapan akan mengurangi masalah kredit macet bagi hasil atau istilah bunga pinjaman paling besar adalah sesuai standar Bank Indonesia. Title: Accessibility of Formal Financing Institution for Micro Business Actors of Fish Processing in the Gresik RegencyMicro business groups are part of Indonesian community which are difficult to access loans from financial institutions. The regulation of the formal institution are troublesome to the groups except for the fisheries business groups in Gumeng Village, Bungah sub district of Gresik Regency. The research was conducted in April 2018. It aims to discover the accessibility of financing patterns of Gresik Regency by a) describing the characteristics of fish processing micro businesses; b) analyzing the constraints and challenges of formal capital access in accordance with the business needs; and c) analyzing access to capital of the business needs, performance, and perspective of future institutional financing. The research used qualitative method with in-depth interviews (key interviews) to key informants (key person), they are Department of Marine and Fisheries, micro business group leaders, and formal financial institution officers. Data were descriptively analysed to illustrate the financing patterns of formal institutions that can be accessed by small business groups in Gumeng Village, Bungah Sub District, Gresik Regency. Results of the study showed that micro fish processing business are reasonable to be developed. They have collaborated with formal financial institution to undergo their business. The study recommended some optional financial patterns to facilitate both the debtors and the institutions as follow : a) Providing non guaranteed loans, b) Providing educational training of financial management. Monitoring and inputs of business pattern from the financial institution officer are also necessary to reduce non performing loan,