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Shortage of liquidity is one of the serious issues affecting businesses now. The University of the Thai Chamber of Commerce warned last week that unless more liquidity is injected into the business sector, companies would be able to maintain employment and operational levels only for another year.

The ironic part of the liquidity problem is that while Thai financial institutions are in a strong position to lend, the rate of lending over the past few months has decelerated. The commercial banks have adopted difficult screening procedures to look at borrowers' ability to service debts, making some unqualified to obtain loans from private financial institutions. Or, some banks are charging business operators higher premiums on the reasoning that they (the banks) have to carry the burden of a higher business risk due to the current economic woes.

The problem is rather called the "liquidity trap" because the banks have money but the process to approve loans is not going as smoothly as businesses wish to see.

Businesses, according to the UTCC survey, have urged the financial institutions to approve more credit and loans. They say that if some companies fail to obtain credit to operate, they might be forced to lay off workers.

Many companies - especially small- and medium-sized ones - are facing grim business prospects because of the drop in consumption. Those that do have reasonable prospects are still facing difficulty in obtaining credit for their operations because the banks are more cautious about approving loans to companies.

The UTCC said that the construction and property sectors would be hardest hit due to the difficulties in accessing credit. Some 700,00 labourers are likely to be laid off, if that's the case. And if the liquidity problem is not addressed urgently, it might threaten an additional 1 million jobs, the UTCC claimed.

Normally, economic difficulties are a good test of a company's strength; only the most competitive will survive. But, amidst this severe economic downturn and liquidity trap, the problem can lead to unemployment across the board, if companies are forced to downsize or shut down.

While the government is spending a huge amount of money to stimulate the economy, the liquidity issue is an issue to be tackled now that financial institutions have become very cautious in approving loans.

While the most affected companies during this difficult period are small- and medium-sized businesses, big corporations have an easier time convincing the financial institutions to approve credit to them. Already, several big companies have implemented cost-cutting measures such as reducing work days, cutting advertising budgets or finding new investment sources by, for instance, issuing bonds to finance their operations. But small- and medium-sized companies don't seem to have many choices.

When the worst comes to the worst, companies don't have much choice but to shed jobs. And the government's re-training programme will not work if the number of unemployed people keeps increasing.

Yajai Chuwicha, head of the UTCC's Chamber Business Poll, said that almost 60 per cent of respondents to last week's survey reported difficulty in finding loans. The main causes of liquidity shortage are lower purchase orders and consumers defaulting on payments. Moreover, these companies cannot get bank guarantees and they are rejected by other financial institutions.

The private sector has called for the government to help enterprises by providing short-term loans and relaxing certain requirements that are difficult to adhere to during this difficult time.

However, the question is how far these rules should be relaxed to enable companies with financial problems to operate without creating a moral hazard.

Some government financial institutions have seen their non-performing loans rise to 50 per cent, thanks to their easier lending requirements compared to the commercial banks. This is because the government's financial institutions follow the government's policies. At times, the requirements have been lax. While the commercial banks feel reluctant to lend to small firms, fearing default on repayments, the government's financial institutions are expected to step in to help. If this weren't the case, the government would not be able to provide credit to target groups. Now, in the current economic situation, businesses are even more desperately looking to the government for help.

The government should use its financial institutions to assist companies in need but, at the same time, should follow proper standards. After all, the money they spend comes from the taxpayer.

At the same time, the commercial banks should be encouraged to work with companies that still have potential but lack capital funding.

After all, Thai commercial banks are still in good shape. They are not as vulnerable as some banks in other countries. But if they continue to impose strict policies that make it harder for companies to obtain loans for businesses, the lack of capital might force companies to default on existing loans or lay off workers. The economic problems could be exacerbated if the shortage of liquidity leads to unemployment and social tension. If that happens, the commercial banks will not be able to remain in good shape either.