EXPERT ADVICE – SME Lending: Injection of Confidence Required
SME lenders have had a nightmarish 7 months. So have SMEs. The good borrowers have been swept up in the collective backlash from banks, reeling from bad and doubtful debts caused by fraudulent borrowers. 2015 was an annus horribilis indeed – a deteriorating macro-economic environment causing over-leveraged and fraudulent borrowers to collapse and genuine businesses to be hit with a liquidity crunch resulting from poor market conditions.
Sound SMEs with genuine businesses and with bona fide intent have been caught in the cross fire as banks went on a spree of pulling the rug from under good business who were facing cash flow issues. Difficulties in distinguishing between the good and bad intentioned borrowers resulted in severe collateral damage. Confidence on both sides – lenders and borrowers is at its lowest I have seen in this market in the past 2 decades. SMEs are running scared and have lost considerable faith in banks as long-term partners.
This has resulted in some knee jerk reactions and a slow down in SME lending by banks. Banks are going slow on new approvals. A herd reaction is also being witnessed – numerous banks have said they would like to avoid lending to trading companies and focus on sectors such as manufacturing, real estate, contracting and so on. This is odd for 2 reasons: first, trading activity dominates local non-oil GDP in the UAE and therefore cannot be ignored; and; second, if all banks do the same thing, will they not over-lend to these sectors?
There is a crisis of confidence and banks being the main and only well-organised stakeholders in the game need to proactively take some steps to inject confidence back into the SME market. Much needs to be done, but here is some food for thought and some concrete steps that may be considered. They may seem random, but each will have considerable impact on confidence and open new opportunities.
First, a step to improve confidence in the SME community by improving access to finance. A vast number of SMEs are unable to enjoy factoring or post-sale financing owing to the high-handed refusal by large entities to sign assignment agreements in favour of banks and their SME vendors. In other words, if a SME supplies goods to a blue-chip entity and the latter agrees in writing to route all payments to a designated bank account of the SME vendor, then the latter can raise financing against at the same. Hundreds of millions in financing can be opened up if this happens. Banks will be well advised to band together, as a group or vide the UAE Banks Association to work with and convince the country’s top large corporates to agree to this. It’s done the world over, why not here?
Second, dodgy auditors have contributed in no mean way to the current mess. Again, banks should collectively or vide the UAE Banks Association come up with a rating system to rate and empanel auditors. At Vianta we have proposed an auditor rating system to some banks as a means of standardising it in the UAE. This common system will help drive the suspect audit firms out of the market, a clean up that is long overdue.
Third, on the subject of auditors, informal discussions reveal that banks have analysed their delinquent accounts to ascertain if there were common audit firms across accounts that have gone bad. A strong correlation has been found and it escapes one why banks have not sued audit firms for misrepresentation or even had them publicly blacklisted. This area needs serious and immediate attention.
Fourth, several successful restructurings of delinquent accounts have been agreed by banks and common standstill/repayment agreements signed. Banks seem wary of publicising this perhaps because they feel it will “encourage” fraudsters to come forward to demand restructurings of borrowings. This is a fallacious approach. Banks are experienced enough to identify those with malicious intent. They should display confidence and publicise successes – this will encourage genuine borrowers to come forward before a crisis occurs and take preventive action in conjunction with banks. A win-win for all.
Fifth, adopt a more forensic approach to conducting due diligence on borrowers instead of relying excessively on financial statements and client interviews. We are working with several banks to assist them with credit support services in this area to enable them to significantly enhance their risk assessment of client risk. Outsourcing specific activities in the due diligence of borrowers will also enable relationship managers to cross sell more services and focus far more on managing risk as well. This is a key area and will help re-build confidence between the Risk / Credit departments of banks and business units, something which has become strained during the past year.
SMEs too need to take action to address the collapse in confidence amongst lenders. There are numerous trade associations in the UAE and it is time for them to wake up and realise that a proactive role by them is required to help their members access finance from banks. Firms such as ours could work with them to develop frameworks to achieve this as we constantly hear banks lament the inert status of associations when it comes to addressing financing issues. A different approach is required on both sides – lenders and borrowers. Things have changed. Status quo it is not.
Vikram Venkataraman is the Managing Director at Vianta Advisors DMCC.
The column does not necessarily reflect the opinion of the Editorial Board or DCG.
To contact the author of this article, Vikram Venkataraman, reach him at email@example.com