## Making Small Beautiful Again: The Challenge of SME Problem Loans in Europe

_IMF Blog, March 31, 2015_

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## Bibliographic details
- Authors: Yan Liu, Kenneth Kang, Dermot Monaghan, Wolfgang Bergthaler
- Published: March 31, 2015

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### Overview
- Six years after the global financial crisis, Europe continues to be weighed down by high levels of corporate debt and millions of nonperforming loans.
- Small and medium-sized enterprises (SMEs) bear a disproportionately heavy burden: their nonperforming loan ratios are on average more than double those of larger corporates.
- SMEs comprise 99 percent of all businesses and employ nearly two of every three workers in Europe.
- Addressing SME problem loans could lay the foundation for a more robust and sustainable economic recovery.

### SME definition and structural obstacles
- SMEs in Europe are defined as employing fewer than 250 people and having annual sales of less than € 50 million.
- Factors that make resolving SME distressed loans harder:
  - Large loan volumes relative to firm scale.
  - Limited financial data about SMEs.
  - Concentration of talent and responsibilities in a few key people (management, shareholders, and employees).
  - Lack of expertise in restructuring.
  - Costly or complex insolvency regimes.
  - Higher costs of distressed financing.
- Strict insolvency laws can deny owners of failed businesses the opportunity to start afresh, dampening entrepreneurial activity.
- SMEs face the same macro constraints as larger firms: cash-strapped banks, weak insolvency systems, and inadequate legal enforcement tools.

### Policy actions undertaken
- Some governments have reformed insolvency regimes, including promotion of out-of-court workouts.
- Countries cited that have strengthened supervision of problem loan management in banks: Cyprus, Greece, and Ireland.
- The Single Supervisory Mechanism, led by the European Central Bank, is expected to harmonize nonperforming loan management oversight throughout the Eurozone.
- Governments have created tax and other economic incentives to:
  - Encourage SME debt restructuring.
  - Facilitate SME access to financing.
- The European Commission has created targeted programs for SMEs and begun providing legislative guidance to member countries.
- Despite these measures, the pace of resolving SME problem loans remains too slow.
- IMF staff published a paper collating experience and proposing practical policy solutions.

### Policy recommendations and practical measures
- Devise a comprehensive, coordinated strategy combining macro and microeconomic support, including:
  - Insolvency reforms.
  - Enhanced banking supervision.
- Consider introducing simpler, more cost-effective insolvency procedures tailored for small firms—time-sensitive approaches are crucial because while creditors deliberate, the value of a business declines ("like arguing on how to divide a melting ice cream").
- Promote "enhanced" out-of-court workouts, which may include some judicial elements or mediation, to restructure debt more quickly and more cheaply.
- Ensure reforms allow entrepreneurs of failed ventures to shed unsustainable debt and make a fresh start, subject to reasonable safeguards.
- Strengthen banking supervision to incentivize banks to:
  - Exit quickly from nonviable firms.
  - Assist in restructuring viable but distressed firms.

### Key statistics and facts
- SMEs comprise 99 percent of all businesses in Europe.
- SMEs employ nearly two of every three workers in Europe.
- SME definition: fewer than 250 employees and annual sales of less than € 50 million.
- Publication date: March 31, 2015.

*Source: Making Small Beautiful Again: The Challenge of SME Problem Loans in Europe (Yan Liu, Kenneth Kang, Dermot Monaghan, Wolfgang Bergthaler; March 31, 2015).*

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## Content in this bundle

- **Staff Discussion Note**
  - [Staff Discussion Note (Markdown version)](/external/pubs/ft/sdn/2015/sdn1504.pdf.md){rel="alternate" type="text/markdown"}
  - [Staff Discussion Note (PDF)](/external/pubs/ft/sdn/2015/sdn1504.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2015/03/eur-on-sme.jpg](https://www.imf.org/wp-content/uploads/2015/03/eur-on-sme.jpg)

_Source: https://www.imf.org/en/blogs/articles/2015/03/31/making-small-beautiful-again-the-challenge-of-sme-problem-loans-in-europe_