This is the 2nd of two articles that present the findings of a survey I had conducted, to ascertain the mood of SME bankers, their reading of the current situation, prognosis for the short term, their fears and concerns. What emerged clearly was that a pall of gloom has descended upon lenders, brought on by a severe crisis of faith in their clients. Bankers responded rather vehemently, as to just how much they mistrusted audited numbers, business models and indeed businessmen.
This article presents the second half of the survey findings and discusses some steps that could be taken by business owners to deal with this situation.
The 1st set of five questions of the survey dealt with the state of business, reliability of audited numbers, faith in auditors and businessmen and so on. The 2nd set delved into a little more detail – on a few key issues that seriously disturb SME bankers.
In question 6, I asked bankers to rank what annoyed them most about SMEs – giving them a common set of gripes to choose from. The results – from most to least annoying: No. 1 was the complaint that SMEs demanded too many exceptions or deviations (from policy and/or established credit lines); 2nd was that SMEs constantly delay submission of information requested; No. 3 – that an extremely casual attitude prevailed in meeting any sort of commitment, in general; and 4, was that SMEs communicate very poorly and never in time, especially where bad news was concerned.
All this has to do with poor behaviour and planning. Business owners must realise that whilst they deal with only a few banks, each bank relationship manager perhaps handles 30 clients. I think the implications are clear. It does not take much to “professionalise” your dealing with a bank to make life easier for your RM. Its simple really, you help him, he helps you.
Question 7 asked what percentage of accountants/finance managers of SMEs did bankers think were competent, to handle lenders. A staggering 94% thought that only 60% of finance/accounts people they encountered were adequate! SMEs mostly employ accountants, not qualified finance managers. Someone who is well organized has reasonable communication skills and a good work ethic is more than enough – a heavy duty CFO is not required. In saving on costs in employing the right person, owners are paying a heavy price by having someone with poor credibility deal with bankers. Owners also tend to favour and reward loyalty and honesty, at the cost of competence. They would do well to ask bankers what they thought of their finance people and take that opinion seriously.
The next had to do with that controversial product – the Business Loan. On being asked what they thought of SMEs who had taken expensive business loans, 56% thought it was a bad sign and the remainder thought this could be justified. Invariably, explanations provided by owners on why they take loans that cost around 18-20%, are weak and hardly convincing. Owners take note – rightly or wrongly, the presence of business loans in a balance sheet does not inspire confidence. We have many customers come to us saying they had no choice but to opt for a usurious business loan, purely because the process was quick with (almost) no questions asked. The bitter and oft repeated complaint was that obtaining appropriate credit facilities was terrifyingly difficult, time consuming and laborious. However, going for the soft option, instead of approaching advisory firms such as ours, comes at a very heavy cost indeed.
Question 9 asked what bankers felt about owners who made investments into unrelated businesses. 57% thought it was unacceptable and 43% thought it was acceptable if owners had a successful track record in such investments. Withholding judgement, but making a contextual statement, one can say that in reality, bankers consider SMEs who diversify, as posing a high risk for various reasons. Here again, owners need to think ahead and structure their investment into an unrelated business carefully, addressing the concerns of bankers as well. We have helped many a company in reshaping their business models, to become more “bankable”.
During the last 12 months, a permanent feature on the long list of bankers’ concerns is whether a business owner has enough “skin in the game” in the UAE, to stay, or run in the face of a serious business problem. Question 10 therefore asked how critical it was for SMEs to have physical assets in the UAE. 81% felt it was extremely important and 19% said it was fairly important. Which in effect means all bankers are saying it is a critical factor. Why? Because it demonstrates financial and long-term commitment to the business. This is considered a mitigant to “skip risk”. Again business owners need to address this, as this consideration will only gain more not less weightage in the future, and requires proper structuring of the business and balance sheet.
There is no magic wand or set of easy answers to manage this situation. It is what it is and owners need to take heed that there has been a serious shift in thinking and things are not what they used to be. Just as banks are changing their credit evaluation standards, owners need to wake up and take steps to improve their own credibility with banks.
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Vikram Venkataraman is the Managing DIrector of Vianta Advisors.