Imagine about a high-tech
system : A medical clock like wrist watch on your arm, continuously analyzing
your body parameters. Your doctor and his team is getting this data, and the
moment there is something abnormal noted, the clock gives blip tone…, before
you can think of something, you get call from your doctor on what you need to
do in next one minute. In next 15-20 minutes, the medical team is in your
cabin, the Helicopter is waiting for you on top of the building to take you to
the Hospital ! You are out of danger. Wow ! and Why? Timely analysis and on
time medical aid. Cost: Of course the service charges you pay to the doctors.
What encouraged you for
this safety major? : Because you know you are important and only on-time
service can avoid disasters.
I was thinking that
working capital lenders are not less than the doctors team in above example since
they have a hand on pulse rate of the borrower company. They have continuous
watch on how the funds are being utilized by the borrower, and the moment borrower
comes out with the need for temporary overdraft or shows signs in the form of delays
in payments, increasing receivables, cheque dishonour, LC devolvement, etc. they
get the first signs of something happening wrong with the borrower. But the
million dollar question is: Whether the lenders should act like the doctors and
immediately take the borrower for restructuring? And why not so? Isn’t it good
to get healed? Isn’t it good to take timely action for the long term benefit of
stakeholders?
First, I think
restructuring would not be the right word. Because, restructuring would be
something related to long term treatment, and we are talking of correcting
something at the initial warning sign stage itself so that the need for
restructuring can be avoided. Also in the current global economic scenario of
slowdown, restructuring has not got a good reputation.
I think this area of
business is still not explored in India because of the bad reputation attached
with restructuring. As mentioned above, there is need to differentiate between
Restructuring and Timely Corrective Action. So, it would be better to devise a suitable
word for such treatment: may be ‘Corporate Nursing’.
Banks presently keep on
analysing the data/accounts of the borrower, however, there is no approved plan
of action in place about what to prescribe as soon borrower needs an emergency aid.
As a result the borrower has to run from pillar to post for temporary
overdrafts / short term loans to meet that unforeseen liquidity mismatches.
The lender and borrower
need to create a plan like a reserve fund for meeting the challenges in
difficult times of business like presently many of the companies are facing. It
is very similar to your medical insurance where you pay a premium today in your
good time for your bad time. So, why not devise an emergency plan to help the
company when times are not good. No harm in paying premium today for that
little but life saving service.
How this can be implemented
in the real world? Here are some the possible ways which I can share:
- At the time of
assessment only the lead bank, carries out the sensitivity analysis with worst
case scenarios and discuss with the borrowers how the business in that
situation would be managed.
- A plan of action,
which could include availability of short term loans, creation of some reserve
funds during good times, borrower keeping some unencumbered assets which can be
offered to lenders as an additional security for the emergency support services.
- Promoters agreeing to
provide their personal guarantees for emergency support from lenders.
- Borrower/Promoters
agreeing to pledge shares for emergency support from lenders.
- A reserve liquid fund
kept ready by promoters as their contribution before availing the emergency
support.
- Borrower keeping a
ready tie-up with another stronger company who will agree to lend corporate
guarantee in emergency times (of course such corporate would be charging guarantee
premium for this) etc.
- Insurance companies
devising products of providing cover to lenders (for securing that additional
exposure taken by lenders under the emergency support plan) when the agreed
emergency support is facilitated on occurrence of event/parameters.
The moot point here is
that the lenders find it difficult to lend an immediate help in difficult time
of borrower because it is also difficult for them to pump more money into a
company which is in trouble. However, if there is already an approved exigency
plan and for which borrower has been paying insurance premium kind of service
fee, then the lenders would have no difficulty in providing timely support.
A timely action taken
by lenders and borrower would help in avoiding exigencies which could be jeopardizing
the interest of all the stakeholders. Therefore, it is of utmost importance to
ensure taking all the action to protect the health of the borrower in the
interest of long term wealth protection.
I leave this thought here
for all of you to nurture it further. Happy innovating.
