Under the COVID-19 pandemic since 2020, loan support programs have been implemented on behalf of small and medium-size enterprises (SMEs) on an unprecedented scale. So-called “zero-zero loans,” or loans with no interest and no collateral, have been provided by private-sector and government-affiliated financial institutions. It is also noteworthy that support measures such as subsidies and benefits, including business continuity grants, rent relief grants, and employment adjustment subsidies, have been implemented on a large scale.
Those business support measures as a whole have had the effect of significantly holding back closures of existing companies by reducing bankruptcies.
Looking at the current levels of the business conditions diffusion indexes (DI) in the Bank of Japan’s “Tankan” short-term economic survey report, the DI for SMEs is already higher than the levels seen at the expiration of the two large-scale credit guarantee programs implemented during past crises (March 2001 and March 2011, respectively). With government-affiliated financial institutions’ “zero-zero loan” programs winding down at the end of September 2022, the crisis response mode of liquidity supply is gradually returning to normal.
Although there is the risk of global inflation or a recession due to monetary tightening, we may say that for SMEs in general, the need to make up for liquidity shortages attributable directly to the pandemic through financial support has weakened.
SMEs that have used loan support programs are stuck with the obligation to repay the funds received to this point. Only when they have recovered from the temporary slump in earnings due to the pandemic can we say that they have overcome and exited the loan crisis. That is the point when they can make the repayment.
Therefore, this article examines the debt repayment capability for SMEs that used loan support programs before November 2020 based on a study being conducted by the author together with Tomohito Honda, a researcher at Hitotsubashi University, Professor Kaoru Hosono of Gakushuin University, Professor Daisuke Miyagawa of Hitotsubashi University, and Professor Arito Ono of Chuo University.
We look at the determining factors of the use of zero-zero loan programs implemented by government-affiliated and private-sector financial institutions amid the pandemic and note several important features.
First, among the companies that met the support eligibility criteria, those which suffered steep falls in sales since the onset of the pandemic, or which had faced higher credit risk since before the pandemic, tended to use support programs. This means that support programs have been applied not only to companies that sustained a considerable shock for the immediate moment but also to companies whose performance had already been poor.
Second, “zombie companies,” which would find it difficult to keep business going without support from financial institutions, are more likely to use governmental support programs than other companies. This finding is different from the results of a previous study that analyzed program user companies before November 2020 just as our study did. This disparity in the results is attributable to the difference in the criteria for a zombie company. We have found that among the companies that are classified as zombies under the criteria used in our study, the share of those which received support from financial institutions, such as changes in the lending terms, was larger than among the companies classified as zombies in the previous study. This indicates that the criteria used in our study are closer to the original definition of a zombie company.
Is there anything wrong with the use of support programs by high-risk companies or by zombie companies? It is natural that those companies have strong needs for governmental support programs. As long as they have a positive net present value, it is appropriate for the government to make support programs available for them.
Moreover, many companies that meet the criteria of a zombie company at one point in time go on to pull themselves out of the zombie status, and therefore, support received by zombie companies does not necessarily mean forbearance support for companies with no chance of recovery. In addition, in emergencies such as the COVID-19 pandemic, it may be a reasonable idea that avoiding the risk that support may be denied to companies that deserve it is preferable to over-addressing the risk of undeserving companies receiving support.
However, the situation would be different if the performance of companies that have used government support programs tended to deteriorate. Therefore, next we observed how much change occurred in such indicators as the cash and deposit ratio, the debt ratio, the share of zombie companies, credit scores calculated by credit research companies, and the business closure rate in the one year after the use of support programs (see the table below).
The business closure rate for companies that have used support programs is relatively low compared with the rate for non-user companies, indicating that loan support programs have helped to prevent closures of user companies. Meanwhile, the margins of increase in the debt ratio and the cash and deposit ratio are larger among user companies. Because of the zero-zero loan program’s “no interest” advantage, many companies used the programs preemptively in order to keep funds readily on hand.
This corporate behavior, which is reflected in the higher rate of increase in both the debt ratio and the cash and deposit ratio among support program user companies, is different from the behavior of companies that used credit guarantee programs in past crises. As far as the portion of the debts that corresponds to the increase in cash and deposits is concerned, debt repayment is considered to be relatively easy.
On the other hand, the margin of decline in performance, including the credit score, is larger among user companies than among non-users. The margin of increase in the share of zombie companies is also larger among user companies than among non-users. While it should be kept in mind that the analysis is limited to the short period of one year after the use of support programs, if these trends continue, it is expected that the performance of user companies will continue to be stagnant, and that the debt repayment capability will fall.
The results of the empirical analysis indicate that although governmental support in the form of loan support has helped to avoid a liquidity crisis, it has not necessarily led to an improvement in the repayment probability through a recovery in corporate earnings.
What is necessary for the support programs that have been implemented in terms of financing for SMEs to prepare a way out of the burden of repaying their financial support? Companies that have received loan support must make efforts to improve profitability through business restructuring and achieve business rehabilitation. However, it has been pointed out that under the pandemic, companies have adopted a wait-and-see stance due to growing uncertainty and tended to avoid making significant changes to business management.
Therefore, credit guarantee associations that have provided guarantees for zero-zero loans extended by private-sector financial institutions and government-affiliated financial institutions that directly extended zero-zero loans should be actively involved. It is sometimes pointed out that there are significant differences between credit guarantee associations that are actively involved in the business rehabilitation of user companies and those which are not. It is also pointed out that government-affiliated financial institutions tend not to meet requests for debt forgiveness in private debt workout programs.
Private-sector financial institutions have a particularly important role to play. Our analysis has found that companies that used loan support programs under the pandemic tend to have close relationships with their main banks. If the main banks, which are very knowledgeable about the situations of borrowers, recommended the use of support programs such as zero-zero loans, that probably means that those private-sector financial institutions have a comparative advantage in providing advice on efforts toward improving profitability and business rehabilitation.
Another important point is the discipline that should be exercised over the financial support that the government calls on financial institutions to provide. The government has emphasized that even after the expiry of the Financing Facilitation Act, financial institutions should continue efforts to ensure smooth supply of funds and to modify lending terms. This, along with the request for thorough funding support efforts that the government makes toward the end of each fiscal year, appears to send the wrong message to both financial institutions on the lending side and companies on the borrowing side, that funding support may be provided even if borrowers do not make efforts toward improving profitability or business rehabilitation.
It is essential to come to a consensus that companies can only replay the loans provided under this financial support by making such reform efforts.