The economic consequences of the coronavirus pandemic are likely to worsen if authorities start to withdraw aid – and banks could "do much more damage" to their balance sheets, said Piyush Gupta, group chief executive of Singaporean bank DBS.
Speaking to CNBC's Managing Asia moderator Christine Tan, Gupta said that government incentives in many countries are helping companies to weather the difficult times ahead. But if these measures come to an end, many companies could not survive, he said.
"If many companies cannot survive … you have this million dollar question of how to deal with these" zombie companies "," said the CEO.
"Continue to use money … use public finance to support businesses, or let creative destruction happen a la Schumpeter? This will be a real challenge, especially in the SME sector around the world. I suspect that this will be a big challenge. " "Big challenge next year," he added.
Gupta referred to a concept popularized by the Austrian economist Joseph Schumpeter that describes the process of dismantling the old in order to make room for the new and improved.
The CEO said politics and civil society would make it difficult for governments to provide long-term financial support to these companies. That "means that you will see a lot more standard, which in turn means that you will see the problems spill over into the financial sector," he said.
For banks, there would be "far more damage" to their balance sheets, Gupta said. But banks around the world have also stepped into the current pandemic crisis more intensely and can endure "much more pain" compared to the global financial crisis more than a decade ago, he added.
More "stress" for the financial system
In Singapore, where DBS is headquartered, the government has forecast an economic decline of between 4% and 7% this year – the worst downturn in the country since its independence in 1965.
The authorities have implemented measures to help households and businesses, including the option to defer part of their loan repayments by the end of this year.
The financial regulator and the city state's central bank, the Monetary Authority of Singapore, said last week that nearly 34,000 mortgages are now undergoing deferral of principal or interest payments, or both. It added that more than 5,300 small and medium-sized businesses have delayed repayment of secured loans.
Ravi Menon, managing director of MAS, said the relief efforts would "take us through the worst part of the crisis", but they cannot go on forever. He explained that the accumulation of debt could increase the risk of default "below".
Gupta said DBS – the largest bank in Southeast Asia – had "made some fairly draconian assumptions about the number of SMEs that may not survive" in its internal stress tests. He warned that the bad debt ratio could be worse than during the global financial crisis.
"I think you will no doubt see more stress for the financial system later this year and next year, and only because the effects of the macroeconomic shock are not yet filtered by the financial system at this point. I think it will come, "he said.
This, along with a low interest rate environment, exacerbates the challenges facing banks. However, the CEO reiterated that the bank had increased its buffers in anticipation of possible credit losses. While open to potential dividend cuts, he said DBS has a sufficiently solid capital base to "not have to go there yet".
"If we voluntarily cut the dividend, I think it's a fair bet to say that the outlook is worse than originally expected," added Gupta.