Lenders must make use of their access to client’s financial status to pre-empt problems
Bankers usually are the first responders when it comes to business turbulences emanating from cash flows, losses, and any other macroeconomic situation. They are supposedly the first to notice the early signs of problems a business may have by way of their insights into the company’s bank accounts, especially in context to borrowing. They can surely foresee this by monitoring cash balances, irregular or frequent overdues, and requests for deferments on the settlement of dues and movement of intercompany transactions. They are required to be vigilant in scrutinising account operations for any early signs of financial fatigue instead of letting the business and relationship fail.
The first measure that bank relationship and credit teams need to see is the receivables position, particularly in case of bill discounting and factoring for corporate customers. The team must not only review timely repayments but see whether the settlements are done by the clients on the due dates directly or instead the customer is providing for these from available balance. It is a common practice that customers to avoid any delays embark on providing for the adequate cash balances to prevent defaults. However, this must be monitored as this gives early signals of likely issues with the client. Either this could be a case of weak cash flows, or it could be an issue of possible disputes with credit notes.
In the recent past, this has been a recurring issue for many project-related contracts, so it is essential for banks to get a sneak preview of client confirmations and not just accept invoices, especially long overdue ones. The few checks banks must do is a close scrutiny of borrowers’ receivables position and cash movements that are not common to the nature of the business, and above all, a deep dive into its overall account trends and patterns. While it is critical for bank officials to be cautious, they must engage the business to understand its financial and operational performance issues and do regular reviews, especially related to any signs of business turbulence, to be forewarned about any looming crisis.
Creditors should take all preventive measures, but also try to ascertain if the issues are due to external factors such as the macroeconomic scenario, an industry slowdown, or due to internal factors driven by a company’s failings. If it is the external factors, banks need to adopt a conservative but more collaborative engagement with the company’s management. However, if it is an internal issue, a more precautionary approach would be recommended. In either case, banks need to be a responsible partner to contain the damage and ensure business continuity.
Banks’ risk mitigation could be put to risk by knee-jerk reactions. In either case, As an ex-corporate Banker, I must say that in most cases, businesses can be rescued through concerted and measured actions on both sides. There are often other issues — banks’ credit administration discomfort with the documentation provided, shareholders’ disputes, or new central bank directives — that puts the bank’s risk team in cautionary mode. These can put the relationship in a fix and often lead to chaos.
A closer partnership is needed between the customer and the banks’ relationship and credit teams. Often, bankers in precautionary mode put a stop to agreed credit-lines to contain the risks. However, these actions often become counterproductive, more particularly in case of a customer impacted by market-driven factors while still retaining a prudent business model. Any negative posture undermines not only bankers’ own interests but also puts businesses at a significant business continuity risk. It must be understood that business continuity is the only guarantor of first resort. Bankers are supposed to be partners and must build sufficient trust in the business while entering a relationship. They must not be fair-weather friends.