Friday, October 24, 2008

SME Loan restructuring through Loan Repayment planning

The present situation of economy is increasing non-performing loans in the banking industry maybe directly or directly related to the downturn in the Global economy. Basically, these problem loans are the result of the borrower’s inability to generate enough income to repay the loans. This inability may be due to management weakness, over-gearing, poor marketing, low productivity or sheer unresponsive to changes in the business environment. Whatever the reasons, timely diagnosis and treatment of these problem loans is paramount to prevent a disastrous outcome. The extent of any cure will depend upon the size of the problem, how quickly it is brought to light and the responsiveness of the business owner to act concertedly.

Lon restructuring is an specialist Job

The task of reviewing a problem account and considering practical remedial solutions is not for new-entrant to banking. The job is enormous as it normally entails identifying the cause(s) of the problem, procuring an accurate financial picture of the business and developing financial and strategic restructuring plans. Upon conceiving the “actual” situation in hand, the person in charge not only has to convince the bank to accept the plan but also need to convince the owners / management to act on the plan drawn

To be effective the person in charge, needs to recognize the importance of economic, market and other external factors. They also need to be a Financial Analysis, Consultant, Economist, Lawyer, Salesman, Beggar and Butcher!

Can All the Accounts Be Restructured / Rehabilitated?

To the hard pressed collection / recovery officer, restructuring is an exercise to defer classifying the delinquent accounts as non-performing and hopefully, the problem would resolve by itself. Unfortunately, this is not the case. As the saying goes, “what will happen, will happen”. Certainly, not all accounts can be rehabilitated. It is only borrower’s having the right “ingredient” and business that can be considered.

The Highlights of the repayment plan

At the end of the entrepreneur should able to supervise and follow up his distressed SME accounts more effectively by working closely with the bank.

It is important to learn

• Determine whether an account can be rehabilitate
• Determine the types of borrowers involved
• Understand and appreciating the financial predicament of distressed borrowers
• Determine the options available to the borrower in resolving the problem.

Following issues are extremely important to understand

• Loan structuring

- why is it so important
- how it can cause problems for the borrower
- what does it involve

• The role of a workout specialist

• Understanding and appreciating why good companies can turn bad
• Businesses do not fail overnight – spotting the tell-tale signs of trouble
• Determine the cause(s) of the problems(s)
• Options for businesses in difficulties
• Assessing the situation

o Conducting a situational audit of the business
o Is the business still viable?
o Is it worth saving?
o What is involved / required to make it work? What additional resources are required?
o Can the borrower do it?
o Should the bank do it?

• Structuring term lending
• Studying cash-flows to determine capacity to service interest / repay the loan
• Studying cash-flows to structure the repayment schedule
• Loan covenants and support - importance of - some types – structuring
• Drawing up action plan – monitoring progress – taking remedial actions
• Knowing when it doesn’t work!

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