Young Smes Insolvency.Theoretical Considerations And Policy Actions

Compared with large firms, young SMEs in general are more leveraged and reliant on bank financing and have significantly higher chances to experience insolvency. High SME insolvency reflect in part the deep and prolonged recession that hit young SMEs hard, both through the collapse in domestic demand and the tightening of credit conditions. Despite the declines in sovereign yields, SME borrowing rates have declined by much less and remain high compared with those for large firms. SMEs present a particular set of challenges for restructuring and resolution. Given the large number of SMEs and their small sizes, lower reporting requirements, and heavy reliance on collateral, SME loan restructuring is more costly and riskier for banks than for large firms. If left unaddressed, the problems of SME indebtedness and insolvency pose a risk to the recovery and financial stability. High corporate debt and non-performing loans represent a significant drag on investment, as credit-constrained firms cut back on spending to repay debt. Young SMEs in particular, given their high leverage and lack of alternative financing, are more vulnerable to a growth slowdown or financial distress. SME weakness can in turn undermine banks’ asset quality and profitability, constraining banks’ ability to provide credit.