A third of SMEs could have been in trouble without Covid supports – Central Bank

It is estimated that 12% of small businesses ended last year in financial distress

As many as 30 per cent Irish small- to medium-sized businesses (SMEs) could have ended 2020 in financial distress without Government supports and bank forbearance during the height of the Covid-19 shock, according to a Central Bank of Ireland paper published on Monday.

The technical research paper estimates that 12 per cent of SMEs ended last year in financial distress, defined as having an inability to meet operational losses through cash holdings or having access to enough cash to service interest payments on debt, it said.

“Half of these firms were distressed prior to the pandemic,” according to the paper, written by Fergal McGann, Niall McGeever and Fang Yao.

“If firms had been forced to use all available cash resources to meet losses immediately, distress rates of closer to 30 per cent are estimated. This shows the central role of government supports and other forbearance in mitigating the effects of the pandemic for SMEs.”


A separate paper published by the bank on Monday highlighted that Irish banks issued forbearance on €4.7 billion of loans between the end of last December and September this year – a period beyond most of the temporary payment breaks that were granted to households and businesses at the height of the crisis last year.

Of the €4.7 billion, businesses accounted for 79 per cent. This equates to 12 per cent of outstanding corporate loans and 10 per cent of SME balances respectively, it said.

Worst affected

Sectoral data show that the crisis has mostly affected the real estate, accommodation and service, and arts, entertainment and recreation sectors.

"These sectors account for 83 per cent of forbearance granted to businesses during the period," according to the so-called behind-the-data report, written by Stephen Sweeney and Allan Kearns, on forbearance measures.

“The data indicates that some borrowers, who had initially returned to the original repayment schedule following a payment break, have subsequently needed new forbearance supports in 2021.”

The authors of the technical research paper estimate that the rate of SMEs under financial distress will fall from 12 per cent in 2020 to 7 per cent by 2024, under an assumption that bank lenders, directors or other equity providers continue to provide funding to companies that suffer operational losses over the coming years.

They warn that the rate could actually rise to 13 per cent in the event that only 60 per cent of losses could be plugged through external liquidity financing. This highlights the importance of the financial system and “policy interventions in smoothing the transitions towards a viable trading future for many SMEs that continue to be vulnerable during the recovery from the pandemic,” they said.

They suggested a continuation of loan guarantees for “illiquid-yet-solvent borrowers” in the event that lenders become more wary over the near term of providing credit. The Government said last week that it would extend the Covid-19 Credit Guarantee Scheme by a further six months to the middle of next year, as the economy grapples with a tightening of pandemic restrictions amid uncertainty surrounding the new Omicron coronavirus variant.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times