Bridging the communication gap with banks
The better you understand your lender and his requirement, the better is your own understanding of your business and the risks associated therein
Numerous articles appear with regard to small- and medium-sized enterprises (SMEs). That is because of a presupposition that SME owners are typically less financial savvy and need reliance on the financial press to understand the dos and don’ts with regard to their banking needs. However, what about the other segments?
Banks typically segment their lending divisions across three broad categories. These are SMEs, Commercial banking (or Corporate banking) and the last is Large corporates/GREs (government related enterprises)/multinational corporations (MNCs). It becomes imperative from the borrower’s perspective to understand where their company is slotted. The product offerings, pricing and talent of the relationship manager varies significantly, as would in some cases, the “Risk Tolerance” towards an individual customer. A longer term and perhaps more benign approach in terms of stress is witnessed in the non SME sector. Each sector also comes with its jargon, terms of lending and the bank’s love for certain financial ‘ratios’. This article attempts to de-jargonise these terms and elucidates the rationale of the ratios. One cannot oversimplify this but neither should their understanding be complicated. With apologies to Henry Longfellow, in banking, the supreme excellence is Simplicity; and this is our intent-to guide the CFOs/Owners and upcoming corporate bankers, who reside in the space between SME and Large corporates. A space, arguably the largest in any commercial bank.
Communication gap
The “size” of relationships in the Corporate banking division often ranges from Dh150 million to up to Dh1billion, in sales. However, this may vary with each bank. Thus it is vital to inquire with your Relationship manager where your company is pigeonholed.
Once done, let us know look at some of the principles of lending, their dressage of banking jargon, the thinking behind such jargon and what it entails for your company. This enables bridging the communication gap with the bank and hastens the processing of your loan. More importantly, the better you understand your lender and his requirement, the better is your own understanding of your business and the risks associated therein. This is KYB — Know your Banker.
End use of Funds
Have you ever thought why banks are shy of the free flowing overdraft facility? In some countries this is called Cash Credit. Banks have no clue how this will be used. This facility has the least documentation and monitoring and thus, often abused. In the hey days of the spurt in real estate, when properties were bought and sold like gum at a grocery and when your corporate neighbour boasted of triple digit annualised returns from property, all one had to do was to dip into the overdraft facility and pay the minimum down payment for various real estate. Guess the impact! As the properties turned illiquid, which they often do, the overdraft became stagnant with no movement and needless to mention, remained unpaid. An overdraft is always payable on demand and the purpose of the facility is to meet ongoing business expenses such as overheads and occasionally advances for inventory which are supposed to be settled from ongoing sales during the year.
Contingent liability
That brings us to an example of the facility where this principle is well charted. This is a Letter of Credit (LC) with a follow through TR (Trust Receipt). An LC in lay man’s term is when your bank has committed on your behalf to pay an identified supplier a sum of cash for an identified material or service subject to all underlying documentation being in order. This is a contingent liability for the bank. When the documents are received from the supplier, the bank remits the funds and these funds are booked as a TR. This is nothing but a loan against an undertaking by the borrower to repay on a fixed date upon realisation of proceeds from sale. Thus the banker knows where the funds are going and for what purpose. The first bastion of comfort.
Read on in the next article on other terms so as to KYB (Know Your Banker). The better this understanding, the higher you improve the chances of your proposal being considered favourably. Enjoy the process instead of experiencing an anguish of SYB (Suffering Your Banking) and wondering why your loan request is taking an eternity.
Akshay Dasani, a seasoned corporate banker is a director at Clover Banke and Resurgent Consulting
