“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 space around the world, I suspect this will be a big, big challenge next year,” he added.
For banks, there would be “far more damage” to their balance sheets, said Gupta. But banks globally have also entered the current pandemic-induced crisis on stronger footing and can take on “a lot more pain” compared to the global financial crisis more than a decade ago, he added.
Gupta said DBS — the largest bank in Southeast Asia — has taken “some fairly draconian assumptions around the number of SMEs that are likely to be unable to survive” in its internal stress testing. He warned that the ratio of bad loans could be worse than the level seen during the global financial crisis. “I think you will see more stress on the financial system in the later part of this year and next year without a doubt. And that’s just because the fallout of the macroeconomic shock has still to filter through the financial system at this point in time, I think it will come,” he said.
That, coupled with a low interest rate environment, is compounding the challenges banks face. But the CEO reiterated that the bank has beefed up its buffers in anticipation of the potential loan losses. While he’s open to potentially cutting dividends, he said DBS has a robust enough capital base to “not have to go there” yet. “If we voluntarily cut dividend, I think it’ll be a fair bet to say that we think the outlook is grimmer than we had originally anticipated,” added Gupta.
CEO of major Asian bank says ‘a big, big challenge’ is looming for the global economy, CNBC, Jul 20