I dislike being a prophet of doom, but I dare say the business community’s financial troubles are even close to being over, something I have been saying since early 2014. In fact, current circumstances don’t warrant any analytical skills to surmise that this is all set to continue for a couple of years at least. Shrinking global trade, deterioration of African and Middle Eastern markets, tightening bank lending, et al make for a scary scenario.
Delinquencies, skips and defaults continue.
This, in my view, is not likely to stop or significantly slow down. However, the pace at which defaults and certainly skips are occurring can be reduced if both bank and borrower change their attitudes in dealing with each other. This involves talking to one another at a stage when companies are facing serious financial and business difficulties but have not yet defaulted with banks. Currently, there is practically no dialogue between lender and borrower during this critical phase that can turn matters either way, depending on how matters are handled at both ends.
However, there is a long way to go before banks and borrowers can sit across a table and talk about how to solve a problem (not default) together. Right now, the situation is not conducive to this for several reasons that I shall explain below. However, the current state of affairs is such that if a client admits to a problem to his banker, warns of imminent default and seeks assistance to work through the same, he will be met with only one response. The banker will tell him that he is helpless to do anything because there is no “problem” (read default) and that if he reports this to his superiors, panic will ensue and a serious risk of withdrawal of credit facilities will be faced. He will go on to advise the client that he should struggle along for as long as possible, and when the inevitable default occurs, return to the bank, which, he will add, will be far more amenable to be understanding and helpful. He may also advise the client to default right away and bring the whole process forward.
This strategy, needless to say, is fraught with numerous serious risks – possibility of withdrawal of credit lines by the lender, other lenders pulling the rug, creditors and employees panicking and the owner facing enormous stress. A serious dent to the company’s reputation will also follow. When it all becomes too much and it appears that the world has gone mad and irrational, the owner leaves town. I have seen dozens of identical saddening cases, lives ruined due to lack of understanding, platforms and processes on either side.
The UAE Banks Federation has established some common norms and a platform to deal with defaulters but there is no common ground anywhere to handle companies under duress but not yet in default.
Why is it so?
Firstly, the larger reason. Short-termism at banks have led them to become transactional, with an eye on quarterly and annual revenue/profit figures and therefore treat clients as such. Gone are the days of relationship banking when banks considered themselves partners and worked with the owners in bad and good times, to build businesses. Banks now engage clients in good times and exit at the first hint of trouble to avoid losses. The poor relationship manager (sales manager would be a more apt title) merely enacts his role determined by this strategy.
Secondly, the more micro and political reasons. Banks do not have the resources or the ability to identify problems with their clients before defaults occur. At best they rely on “early warning signals”. However, most early warning signals are picked up from the clients’ interaction with the bank – not necessarily the first stage at which companies begin to be in financial distress! Distress begins long before that and surfaces at banks when a fair amount of rot has already set in. Therefore it will take a brave man to try and convince his chain of command that there is a problem with an account because there are risks. A risk that his bosses will ask him to exit the account, defeating the purpose and causing loss of face or risk of being over-ridden to watch and suffer the consequences in silence.
Then there is the Delinquency Fatigue factor. Bankers are quite weary of companies regularly going belly up, so there is marked resistance to acknowledge yet another problem.
Third, this discussion throws up two more important lacunae in the system, something a learned friend of mine and Chief Credit Officer at a local bank, brought up at a discussion the other day. There is no separate division in any bank to work with “special mention” accounts that require assistance with turn around before problems explode and/or rehabilitation (this is after defaults occur). He pointed out that an account goes straight from the relationship team to ‘Remedial” on persistent default and then slips way into oblivion at “Recoveries”. Borrowers, he explained, had no opportunity for lenders to work patiently with them for a “turn around”. Again, this reflects the hard wiring of banks.
Fourthly, he pointed out that there is no platform or intra-bank process to bring banks together to address such turnaround or rehabilitation cases. So basically, nobody knows how to collectively deal with them. Such cases variously termed “special mention accounts” etc. have had separate guidelines drawn up for their treatment by Central Banks around the world including the USA, UK, India, Europe and so on. The UBF might want to take notice! My senior friend had interesting thoughts on this subject, which is fodder for the next article!
So what is to be concluded from all this for business owners? Lesson number one, do not leave the problem until its too late. Defaulting with banks to create “the problem” is not the solution any more in this tense, trigger happy and bad-debt-weary world. Second, know that banks have every desire to avoid losing money and therefore are more amenable to working with you. Third, don’t fool yourself, walking into the bank and telling them you have an imminent or currently lurking and real problem, is a really bad idea. This sort of honesty is not the best policy and will cause panic.
For reasons explained above, the best solution is to work with proper advisors to approach banks softly-softly, with solutions not just problems. This approach involves back-channeling, informal discussions, networking etc. which an experienced advisor can bring to the table.
We have worked with numerous business owners and devised strategies to solve the problems of both the bank and borrower, from cases that involved massive defaults, absconding owners as well as struggling businesses that have turned around with help. This sort of advisory or restructuring work needs to marry the needs of both and workable, politically acceptable solutions found. Don’t try and do it yourself.