Negotiating a Loan during Slowdown

Ten-Point Recipe for Loan Negotiation with a Bank in Slowdown

Most first generation entrepreneurs, CFOs and CEOs of mid-corporates find it tough to negotiate a business deal with a bank. Banks usually are tight-fisted in times of recession to grant enhanced limits. They also claim full information of the enterprise, ecosystem in which it operates and the depth of the export markets. They also have a track record and credit record of the enterprise seeking to expand its operations. Economy in slowdown is tough time both for Banks and Enterprises. One has to run twice the speed in slowdown to remain where they are like Alice in the Wonderland.

Exacerbated NPAs despite the IBC have made Banks risk averse. Increase in frauds further accentuated risk aversion. The enterprises requiring higher working capital and those in export markets requiring packing credit facilities are facing formidable challenges. However, Banks may not like to lose good clients. Further, particularly those in PSBs, are also under pressure from the government to expand the portfolio in farm and MSME sectors.

Banks also actively work on the recoveries, write-offs of NPAs and topping up their Balance sheets. They are under pressure on the Asset side of the Balance sheet and therefore, look for clients who, despite slowdown, come up with a good proposal. And a good proposal in their parlance means that they would have little to exercise their thinking. Their time is under pressure most times in video conferences, meetings, Seminars, publicity and several internal committees.

Look at Mr. Raman who understands the predicament of the current banker and who is a CFO of a mid-sized corporate entrusted with the task of increasing domestic market by 100% and overseas market of the Company’s innovated tablets and injections duly approved by the US Food and Drug Administration. He is sure that the Banks would not like to lose a good client for another bank. Since his Company has proven track record, he was hopeful of the deal for higher limits on both working capital and export packing credit.

He took an appointment with the GM (mid-corporates) of the Bank one fine morning. He did his homework well. He gathered full data of the enterprise; environment in which the entire industry has been working; economics of his proposal; the area into which the Company would like to expand; the types of clients the company are targeting; the distribution system of the new markets; the incentives Company has on table; the drug controls of both India and the Asian economies in which the Company is going to operate; the disease patterns there; government health care and insurance mechanisms; the IPR and above all the financials. He also worked on the stress testing of his projections.

He presumed that in the first instance the Bank would know of the enterprise and ecosystem equally well. He started off with all humility. During the discussions, when he noticed that Bank officials do not have half the information, he had either on the product or competitiveness but are looking at only the financials and spreadsheets and not the rationale behind them, he pitched his fork high. He left some issues deliberately for the bank to come up with subsequently. He did not press for a solution instantaneously. He left a cooling time with the Bank.

After three days, when the call came, he went with his accounting team and with the required project proposal in the bank’s usual format. He took care to ensure that no additional collaterals would be offered. He kept under his armpit the directors’ individual guarantee to offer when necessary. Finally, when asked, he just mentioned that it was the company’s intention to go for public issue at a propitious moment and raise equity to meet future needs and therefore, it would be difficult to offer the same at the moment. The deal got through.

The recipe is simple:

1. Do your homework well: know your own enterprise, its SWOT.

a. Brainstorm possible implications of the proposal with the Board and internal management.

b. Cushion the proposal with adequate collaterals and guarantees but keep it undisclosed.

c. Go as a team for presentation with your confident technical and financial team for discussion.

2. Do not thrust yourself at inconvenient times for the banker.

3. Be transparent during negotiations.

4. Be humble; but do not compromise on limits sought as it might affect profitability.

5. ERP will help keeping the data required by the Bank and tax authorities transparent and timely.

6. Go with a vision, objectives and goals for the future.

7. Keep also the succession plan ready.

8. Give reasonable time to the Bank to think and come back with their offer,  but indicate your expectation for the result and also indicate that a Bank and a leading NBFC have also indicated their willingness to look at the proposal to attract competitive pricing of the loan.

9. Post sanction and post disbursal, keep compliance of terms and conditions tidy.

10. Make sure of half-yearly review of the limits by the Bank by feeding the required data online.

The above principles work equally well for the MSMEs. Since the MSMEs lack the attributes of a CFO and accounting team, they need to look for committed process consultancy firms like the Telangana Industrial Health Clinic Ltd (TIHCL) who handhold them and help scaling up with strategic interventions at the right time.

Published in Telangana Today 

The Probability of Gains and Risk Aversion

The Probability of Gains and Risk Aversion:

The frontiers of failed negotiation of Jet Airways

Toss a coin to help a friend taking decisions with 80 percent success unlike in Sholay picture where Amitabh Bachan showed 100 percent success with a coin of both sides’ heads only and no tails to lose. In the case where the coin has both head and tail, the risk of loss looked far lower than the prospect of gain.

I had a friend who bargained the landed properties stuck in litigation knowing well that the disputes take at least 20-25 years to settle in court. In the interregnum he used to invest on land – for a dug-well or borewell, commercial farming, horticulture and food crops in an admirable mix. In 80 percent cases his gamble paid. In the 20 percent cases where he lost also, he recovered the entire investment. He left a huge property for the progeny to gain. His estimation of risking the loss proved negative and probability of gains proved positive.

A colleague of mine, since the days of joining the bank, used to buy just Rs.100 worth gold and at the end of 30 years when he reached the position of Deputy Managing Director, he was rich with gold and cash. On a fateful day for him, after attending a marriage function noticed huge burglary and his life’s gold fortune is lost excepting those worn by his wife. The Risk of loss was least expected by him so much as the probability of gain.

In all these cases, to quote ‘Thinking Fast and slow’ by Economics Nobel Lauriat (2002) Daniel Kahneman, both probability of gain and risk of loss are a combination of skill and luck. Indian banks’ ability to measure the probability of gains versus the risk of losses missed out both on ‘skills and luck’!!

Take the latest case of Jet Airways that involved Rs.8500cr of assets in banks’ books and Rs.25000cr of non-banking assets for recovery. Banks involved that included the lead lender SBI taking the pilot seat must have spent Rs.100-150cr in terms of time spent, travel and negotiation costs and yet failed and now it is taken to the NCLT. 50% of debt is already provided for losses.

In this case like in all corporate bad debts, the borrower-firm is provided ample opportunity to put forward its point of view. Naresh Goyal placed his cards dexterously and the final jolt came when Etihad wanted 85 percent haircut. And there is no case in Middle East where Banks ever conceded 85 percent haircut!! Indian banks proved that they lacked both skill and luck to ensure a probability of gain even amidst huge loss staring at them.

Theoretical underpinnings in behavioural economics suggest that the tendency to overcome the desire to achieve gains is blurred by the desire to avoid losses. Foreseeing gains with a historical hindsight of losses require certainly either a broad vision or fresh thinking. For the involved parties it is difficult to have either. RBI seemed convinced of the need for an independent evaluator in their June 7 instructions relating to the Resolution Plans of corporate and mid-corporate enterprises.

Take the case of around one lakh estimated sick MSMEs involving about Rs.102000cr of which at least 50 percent could easily revive if  (1) such independent evaluation for revival package is done; (2) the package is discussed with the beleaguered enterprise;  (3) the cost of evaluation is borne by the Bank and (4) revival package is delivered within specific timelines. The probability of gain against the provided loss of 50 percent is around Rs.51000cr with employment gains to the extent of 4-5lakhs and tax gains to the exchequer to an extent of at least Rs.15000-20000cr.

T

he cost of revival even if third party assessor is engaged for both the revival package and follow up would be far less than that for corporates of the likes of jet airways and Kingfisher. Since the regulator has already announced a policy for resolution and if the regulator is non-discriminatory similar guidelines should be announced for the MSME sector.

The problem, however, is in the identification of assessors/evaluators since the presence of MSMEs on the brink of failure is spread throughout the country, al bait, in a few states like Andhra Pradesh, Gujarat, Haryana, Karnataka, Maharashtra, Punjab, Telangana and West Bengal.

It is only Telangana that thought of Industrial Health Clinic to tackle sickness on a firm footing. During the last one year, this state promoted fintech firm has revived 41 enterprises, stabilizing employment of around 500 persons and protected investment of around Rs.10.62cr.

Right diagnostics, timely release of resources and continuous handholding and monitoring supported this process of revival. Had the Banks shown initiative, the effort would have reached at least 200 enterprises.

MSME Committee that presented its report to the RBI suggested Diagnostic Clinics as part of the Entrepreneur Development Centres little realising that the persons and skills required for diagnostics and resolution are far different from those for enterprise development  Even the fund suggested for distress resolution, viz., Rs.5000cr has not been structured properly, particularly when the stress of MSEs is prevalent in 10-12 States. Hope the RBI would draw lessons from the failure in revival efforts thus far from the Banks and review its directives. If the Banks can contribute to the Fund to the extent of 1% of NPAs in such portfolio and help the States setting up Industrial Health Clinics like Telangana Government, results can flow and investments can revive speedily.

Daniel Kahneman says: “Overweighing the small chance of a large loss favours risk aversion and settling for a modest amount is equivalent to purchasing insurance against unlikely event of a bad verdict.”

https://knnindia.co.in/news/newsdetails/features/the-probability-of-gains-and-risk-aversion-the-frontiers-of-failed-negotiation-of-jet-airways