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Once stimulus packages run out, many businesses will crumble: DBS

Group chief executive Piyush Gupta is particularly worried about small and medium enterprises and says next year will be challenging.

July 20, 2020 / 09:21 AM IST

The global economic situation will worsen once authorities turn off the liquidity tap that has been helping businesses tide over the current difficult period and many companies may face an existential crisis, said Piyush Gupta, group chief executive of Singaporean bank DBS.

Speaking to CNBC, Gupta said if many businesses fail to survive "... you’ll have this million-dollar question of how do you deal with these 'zombie companies' ".

"Do you keep putting money ... using public finances to support companies or do you let creative destruction happen a la Schumpeter? This is going to be a real challenge, particularly in the SME (small and medium enterprise) space around the world, I suspect this will be a big, big challenge next year,” he added."

The DBS CEO was referring to the concept coined by economist Joseph Schumpeter who described the process of dismantling the “old” to make way for the “new and improved”.

Gupta added that politics would further disrupt the economic support that governments around the world were providing, leading to more defaults that would ultimately have a snowball effect on the financial sector.

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According to Gupta, the other side of the pandemic was looking "far more damaging" for banks, which had already come under the scanner as the coronavirus situation escalated into a pandemic. But, banks also entered the pandemic-induced crisis on a stronger footing and could take on "a lot more pain" compared to the global financial crisis of 2008, Gupta added.

Various global financial agencies have marked down marked India's gross domestic product (GDP) growth to negative levels following the economic disruption caused by the viral outbreak.

Rating agency S&P recently said India will suffer the biggest GDP loss of 11 percent . BofA Securities expects the country's GDP to contract by 3 percent in FY21 because of the coronavirus pandemic, assuming the economy opens up fully from August.

Domestic rating agency ICRA has also revised its forecast for contraction in India's GDP in FY21 to 9.5 percent from 5 percent, as lockdowns in some states have effected the recovery seen in May and June.

Most of the analysts have projected the GDP to contract in the range of 5-6.5 percent this fiscal.
Moneycontrol News
first published: Jul 20, 2020 09:21 am

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