BIZENIUS Banking Academy Program Mozambique...ii) Maturing Loans Reports should indicate when loans...

BIZENIUSBanking Academy Program

Early Warning Signs and

Debt Restructuring

August 24th and 25th

2020

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About Us

BIZENIUS Business Solutions Private Limited is a Globalconsulting firm specializing in providing regulations, risk &compliance , trade finance , innovation management consultingsolutions to Africa, Asia, Europe, MENA and Pacific region instrategy, innovation, problem solving and businesstransformation across Banking and Financial institutions andrecognized as a world leader in Performance Excellence.

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Introduction

Name:What you do:

What are you really good at :

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expectations

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training

Expectation

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Early Warning Signals (EWS) of potential distress :

✓ Review of key financial EWS ✓ Danger levels of different financial covenants✓ EWS derived from the financial statements✓ Identifying key external factors affecting corporates✓ Management risk and its impact on corporate

recovery✓ Strategic risk and its impact on the problem client✓ Credit Ratings: Credit Mitigation

Debt Restructuring –Key drivers :

✓ Impact on corporate clients in the light of the global Covid

19 Pandemic

✓ Rising tide of problem loans and corporate insolvencies in

2020

✓ Non-performing loans and the challenges faced by bankers

✓ Key trigger events for initiating the restructuring process

✓ Different types of problem loan resolution

✓ Knowing when to ‘pull the trigger’ on the restructuring

process

Different restructuring and recovery methodology :

✓ Administration, Receivership and Liquidation✓ Different rescue procedures✓ Position and rights of management✓ Ranking and claims of creditors✓ Time limits of filing claims✓ Pre packaged Insolvencies

Implementing the Restructuring process :

✓ Understanding different stakeholder interests✓ The case for and against a moratorium✓ Review appropriate restructuring strategy✓ Financial projections and sustainable cash flow and

debt✓ Negotiations and pricing the workout✓ Highlights the best practice , group discussion and

sharing of best practice

✓ Covenant breach: Characteristics of effective covenants

✓ Debt Capacity: how to forecast future debt capacity✓ Liquidity crunch: Refinancing challenges, other

calls on liquidity✓ Majority decision issue

Triggers to Distress :

✓ Agreeing forecast with the borrower✓ Reporting requirements for the borrower✓ Agreeing the new terms with the borrower✓ Setting covenants and covenant

Monitoring distressed and non performingdebt:

Introduction

Sources of information for EWS;

i) Bank

ii) External Sources

iii) Borrower

iv) Financial Modelling and Sensitivity Analysis

DAY 1

Debt Restructuringi) Available optionsii) Case study

DAY 2

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Timeline

The key to successful loan management is a routine that you do periodically the frequency of which is determined by how quickly something could go wrong.

The purpose is to ensure that the borrower returns borrowed money to the bank with interest – in full and on time.

Introduction to Loan Monitoring

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Main factors to be considered;i) Which risks are critical to successful performance?ii) Is Management responding to these risks to mitigate them?iii) How quickly could the situation change requiring a new/different

response?iv) What would be the impact of the potential changes?v) Can you set up an Early Warning System (EWS) to help anticipate risks

and events that might affect the borrower’s ability to repay?

Introduction to Loan Montoring

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Monitoring should focus on; i) Key success variablesii) Critical risks that could have the greatest impact on

repayment

Monitoring information is obtained from three main sourcesi) Bankii) Borroweriii) External Sources

Loan Monitoring

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Information from bank will be of two categories, Loan Activity or Current Account Activity.

Loan Activityi) Exception Reports;Ensure compliance with the terms assuming the relevant terms have beenentered into the system. ii) Maturing LoansReports should indicate when loans are coming up for renewaliii) Past Due Loans: Frequency that a loan goes past due and average tenor of the past due period

Information from Bank

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iv) Loans with ExceptionsExamples are;• Insurance cover on fixed assets pledged as security has been cancelled or has expired or a request

for a second charge has been made by a third party• The company has not conformed with the loan covenants set in the loan agreement• The level of the company's account is in excess of the approved overdraft limit• The loan warrants or has been given a deteriorating credit grade• There has been a request for additional funds, an extension of maturity or other change in termsThere are three major types of covenants:i) Financial Reporting covenantsii) Performance Based covenantsiii) Operating Covenanatsv) Extension Requests

Studies have shown that 40% increase in non-seasonal borrowing of working capital is a

precursor of loan problems.

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Current Account Activityi) Overdrafts and drawings against uncleared effects: There is a risk of serious liquidity or other funding problems in the business needs if customers overdraw their accounts outside arrangements or continually make drawings against uncleared effects.

ii) Account Activity analysis. This is an easy way to monitor cash balances. A sudden or substantial decrease in a customer’s deposit balances may be a warning sign. If the loan is short-term and the cash balances varies significantly from projected levels, this is a warning sign. Analysis should be made whether the account turnover is commensurate with ability to repay principal and interest.

iii) Contingent Liabilities; Other information available with relation to the account which requires monitoring to identify whether patterns are changing e.g are bills drawn under letters of credit paid on time, have performance bonds typically been called?

Trade enquiriesi) Unusually numerous enquiriesThis indicates that other companies are concerned about the creditworthiness of your customer. Your customer may be stretching accounts payable to compensate for a shortage of cash. When answering these enquiries, discreetly determine the nature of the problem, if one exists. You should be guided by your banks’ policy for giving or obtaining opinions.

ii) Customer stops taking advantage of trade discountsThis may indicate a cash shortage and should be investigated. (This may also arise due to changes in suppliers’ circumstances and the impact of the change on the borrower needs to be assessed)

External Sources of Information

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Credit Enquiries:

i) Enquires from other financial institutions. These will be enquiries from other financial institutions and may suggest that your customer maybe trying to obtain additional financing which will generally be prohibited by the terms of the loan agreement. You should determine the cause of this additional borrowing need and consider how the servicing of the increased debt will affect your loan. Your customer may also be considering changing banks and this serves as a warning signal and may require you to determine why.


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Credit Enquiries:

ii) Discounting debtors; Discounting or factoring is usually an efficient way of financing debtors. Any change in the pattern of trade receivables should be examined for risk and opportunity. Requests for release security over receivables in particular should be carefully examined and the banks’ debt priority in relation to other providers of finance such as factoring houses should be ascertained.

Factoring and discounting can be accounted for either on or off balance sheet and so monitoring should establish a full and very clear picture. Additionally ensure that the company is not over-trading and watch out for the impact of price discounting.


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iii) Failure to meet other financial obligation; If the company or its directors default on other debts, the company's’ financial position is questionable. Quick action of quickly obtaining the company’s financials is apt.

iv) Legal actions. A lawsuit might set your customer back financially. Find out the amount involved in the dispute and whether your customer has insurance or adequate reserves to cover the suit.

v) New mortgages and liens. An indication that other lenders are concerned about the company. In the event of a liquidation the bank may have difficulty recovering the loan.

vi) Official management or liquidation. Regularly update with journals and gazettes that provide information about potential actions against your customer and details of official management appointments or liquidations .e.g. If other creditors have taken steps of having receivers appointed to the company


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vii) Labor unrest; A strike or labour dispute can easily jeopardize loan repayment. Strikes in related industries can also have a serious impact on your customers repayment.


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Information from the Customer

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When you contact the customer, request for additional information so that you can update your static data. A lot could have changed in the life of the loan

Obtain as much detailed information as possible:• Industry• Sector• Nature of business• List of key suppliers• Related parties• Average requirement and utilization of working capital• Market intelligence• Stock valuation• Collateral

i) Large unexpected borrowing requests or renewals. Even when you have established a good relationship with a customer, each loan request should be treated as if it was from a new customer. Carefully analyze the purpose of the loan before you make a repayment source analysis. Identify the causes of the additional borrowing need, it may indicate poor management practices or erroneous information or it could mean that the company has met with greater success than expected. Unexpected requests for renewals of existing loans can be trouble signs and might indicate that original source of repayment did not materialize or that the funds were diverted to another purpose. Find out what happened and why.

ii) Diversification; Many successful businesses have attempted to diversify often disastrously. Diversification can change the risk for the company and the bank. How heavily will the company invest in this new area and if the investment is substantial enough to undermine the company additional controls on the borrowing relationship maybe added.


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Diversification

into PPE

production?

iii) Inability to meet commitments on schedule; This may involve slowdowns in production, delivery or contract completion. The results can be cancelled orders, returned goods, penalties assessed or payments held back. These conditions often arise from overselling or poor planning. They are a direct reflection on the quality of a company’s management.

iv) Recurrence of problems presumed solved. Personnel problems rank high on the list. A constant turnover of book-keepers or office managers who are expected to correct the shortcomings of their predecessors provides a good example. This often indicates questionable management practices and a lack of executive stability.

v) Lack of functional planning.; Forecasts for both short and long term range operations are non-existent, vague, or unreliable. What actually occurs seldom bears any practical relationship to what was predicted. All plans are based on the needs of the moment.

Information from the customer

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vi) Poor financial housekeeping; Owners are unwilling to pay for good quality auditing reports or functional book-keeping systems. Procedures to protect assets such as cash and stocks are inadequate or non-existent. The maintenance of books and ledgers is sloppy and schedules are posted erratically.

vii) Changes in personal habits of key people. Though not easy to discern, changes that occur if individuals who control the company succumb to personal vice can affect the company and the bank where possible should be aware of such changes.

viii) Changes on management, ownership or key personnel: The risks here are the unknowns in the attitudes and abilities of the new people. Risk is especially high when there is no evidence of proven skills or experience in the firm’s primary line of business. If new management’s experience was gained during relatively good times there is no way to judge how it will perform under adverse economic conditions.


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Financial StatementsIn conjunction with the bank’s own records, the customers financial statements maybe the most important source of information about the business. Your customer should be required to submit periodic statements. Financial statements are not just audited accounts but also stocks and debtors listings, management information and cash flow projections. Small businesses with limited audited accounts provide a superb opportunity to sit down with the customer and work out what the accounts should look like. Some trouble signs that may be associated with your customer’s financials are:

i) Late or incomplete statements; First find out why the statements are late and then insist on complete statements. You will need the information both to offer assistance to the company and to protect the interests of the bank.

i) Change in auditors or accounting practices; Pay close attention to the auditors opinion and to the notes to the accounts. If there have been significant changes in accounting practices since the previous period the customer may be hiding something.


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The customer may change accounting practices to appear more solvent before coming to you with a large loan request. In some cases a company will change auditors rather than accept a qualified adverse opinion.

iii) Adverse information; This can be a serious trouble sign. Analyze your financial statements as carefully as you do when considering a loan request. Insufficient liquidity, excessive leveraging, or poor sales and profits may mean that your customer will have trouble repaying. Compare actual performance with projected performance.

iv) Non-compliance with terms of loan agreement: The loan agreement may include certain covenants concerning the customers financial position mostly based on the key assumptions of the cash flow analysis that was done when the loan was given. If the company’s financial position does not meet the covenants of the loan agreement then the company is automatically in default of the loan and is likely to have trouble repaying.


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v) Low cash balance; If you haven’t noticed the borrowers cash problem while monitoring the banks own sources of information, you might uncover it on the financial statements.

vi) Slowdown in debtors; To find out whether your customer’s collection of debtors is actually slowing down, compare the current debtors days on hand with the number of days on hand in previous periods or in their projections. A slowdown in debtors collections will affect your customers cash position. e.g it may turn out that a sizeable percentage of the borrower’s customers are not paying because the merchandize is defective or of poor quality. This means that the profit has been or will be overstated. Obtain a schedule of ageing's if you suspect a problem with the debtors.


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vii) Excessive Stock; Stock is the most difficult to evaluate from the financial statements and the most likely to contain irregularities. A large stock may include a high percentage of defective or obsolete merchandize. The value of any stock depends on its marketability. If the customer’s stock seems excessive find out what the figure on the balance sheet actually represents. It may time for a customer visit. Unsalable stock could mean that profits as well as the company’s debt serviceability have ben overstated.

viii) Speculative investments; If your customer is investing heavily in shares or in other businesses the bank’s risk is greatly increased. Many loan agreements specifically limit the outside investments a borrower can make. If a major investment is to be made you may want to obtain additional support for the loan or call up the loan as quickly as possible. Your previous analysis of the company should indicate the degree or risk the new investment will introduce into the loan situation.


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ix) Increase in trade creditors; Customer may be riding the trade to compensate for a cash shortage. Which maybe the only way the company can meet its account fluctuation provision. This can disrupt the flow of supplies and affect the company’s ability to continue operations. Suppliers have a limit at which they will cut the company off.


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Plant or company visitsA visit to the customer’s plant or company officers usually provides some indication of trouble which may not obtained from other sources such as;i) A marked deterioration in the company’s appearance may reflect a lack of interest

on the part of management. A poor physical appearance wont impress the company’s customers and suggests that the company’s performance may soon suffer if it hasn’t already and eventually reduce profits.

ii) Discouraged or demoralized; Poor employee attitude has a negative effect on the company’s overall operations. Consider labor conditions and the company’s position with regard to unions. If there’s possibility of a strike or labour dispute weigh its impact on the company’s ability to repay the loan.


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iii) Overstocking :If the company’s financial statements show a substantial increase in stock find out why. The best way to evaluate a company’s stock is to see it or to ask a bank agent to view it. Investment in excessive stock may be the cause of cash shortage. The company might be stock piling raw materials if they are subject to price fluctuations or are sometimes unavailable. However an accumulation of finished goods for which there are no confirmed orders for delivery may indicate that the company is having trouble selling its products.


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iv) Damaged or obsolete stock: Stock is valuable only if its converted to cash. Large amounts of damaged or obsolete stock suggests that the value of stock maybe overstated in the financial statements. Evaluate the company’s financial position because this could eventually reduce profits.

v) Excessive downtime or repairs: This suggests that the company may need to invest in more fixed assets in form of essential equipment. How will this additional debt burden affect repayment of existing loans?


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Information from the customer: Financial Statements

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Fraudulent signs• Overstated Sales• Overstated Inventory• Understated Liabilities• False valuation and appraisal of assets• Audits cease• Unusually large cash transfers• Large cash balances in non-interest bearing accounts• Management overrides of internal controls• Incomplete and missing documents• Asset sales to related parties• Unusual supplier relationships• Staff working unusually long hours• Inappropriate attitudes and reactions to queries

Read the Tree Valley Nursery case study. Use the information provided to answer the following questions:

i) Do you see any signs of trouble in the financial statements?

i) Would you take any action at this time? Why?


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Sensitivity Analysis is used to determine exactly how sensitive a borrowers cash flow is to change in critical variables.

Sensitivity is the amount of change in the projected repayment capacity that results from a change in a hypothesis. e.g you might test your borrowers sensitivity to changes in Debtors Days on Hand (DDOH) by calculating one average day’s sales and forming a range of hypothesis about DDOH. What will cash flow be if DDOH is 30,45 or 60.

A sensitivity analysis can be performed on historical or projected financial statements. Certain key variables can be changed to determine how that change affects the company’s ability to repay.Decision about how much sensitivity analysis is performed depends on the complexity of the borrower’s business and perceived risks. However, there are certain major variables that will affect any company’s cash flow to some degree:


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The major variables that interact to produce cash flow and repayment capacity and key questions about each is as follows:i) Sales growth – When, how fast and why (price or unit volume) will sales increase? What

additional working investment will be required for each new unit of sales?ii) Gross Margin – Can the company pass on cost increases? What is the effect on cash flow of 1%

change in the gross margin?iii) Operating expenses – Can the company control the major expense items such as salaries?iv) Interest expense – How vulnerable is the company to a rise in interest rates? What will interest

rates be?v) Collections of debtors – Can the company control its debtors? How much is invested in debtors

for each day of DDOH?vi) Investment in stock – Can the company maintain tight stock control? How much is invested in

stock for each day of stock DOH?


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vii) Payment of suppliers – What terms will suppliers offer? How much spontaneous financing will be available to support sales growth?viii) Investment in fixed assets – Can the company get fixed assets set up and productive when needed and at the budgeted cost?ix) Payment of tax – What will tax rates be? Will the company be providing for deferred tax?x) Withdrawal of profits – How much profits will the owners take out of the business as dividends or drawings?


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Characteristics of Sensitivity AnalysisOne Assumption at a TimeOne of the simplest and most common approaches is that of changing one factor at a time. Whether the assumption is about the change in a borrowing rate or a change in the working capital metrics (Days Sales, Days Payable, or Day of Inventory), one can change each assumption individually to see the outcome on working capital, profitability or loan covenants.

Not a Story About WhyUnlike Scenario Analysis, where multiple variables are used to outline detailed settings of both positive or negative, Sensitivity Analysis looks at only one variable at a time. It is less of a story and more of a what if. What if sales decline by “x” percent or what if the costs of raw materials increases by X. These can be looked at one at time but don’t provide a complete picture.


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Used to Determine Which Assumptions Matter Most

Sensitivity Analysis changes variables/assumptions one at a time, which makes it possible to see which variables/assumptions will have the greatest impact on a business. For example, the borrowing rate can be changed by one basis point at time, or the gross margin percentage can change by specific increments. The results of one could be drastically different than the other and lead to different causes of action.


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Benefits of Performing Sensitivity Analysis

Deeper AnalysisWhen Sensitivity Analysis is performed, each independent variable and its effect on the dependent variable is analyzed. Their movements are studied, and the results are compared. This in-depth analysis will aid in providing a more accurate forecast.

Quality CheckSensitivity Analysis provides management with an understanding of which variables have a high impact on cash flow. For example, in a Sensitivity Analysis of a company, management may discover that a certain raw material used in their product affects the costs by up to 20%. Therefore, management can concentrate on sourcing this material from other vendors or look for alternatives to improve profitability.


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Strengthen “Weak Spots”

As Sensitivity Analysis assesses each variable independently, it can identify critical variables that may act as a weakness. For example – it may be discovered that raw materials are extremely volatile to changes in currency. Measures can be taken to reduce the impact, say by hedging. Thus, it can be said – weak spot is identified and strengthened.

There are some disadvantages to using sensitivity models. The outcomes are all based on assumptions because the variables are all based on historical data. This means it isn't exactly accurate, so there may be room for error when applying the analysis to future predictions.


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Task Sensitivity Analysis

Take a pessimistic attitude that sales will decrease by 20%. Calculate the % decrease in profit after tax for the given financials.

• Mortgage loan instalment > x time credit balance• Mortgage and consumer credit days past due• Decrease in the credit balance > 95% in the last 6 months• Average total credit balance < 0.05% of total debt balance• Forborne• Nationality and related historic loss rates• Decrease of payroll in the last 3 months• Unemployment• Early arrears (e.g. 5-30 days of past due, depending on portfolio/client types)• Reduction in bank transfers in current accounts• Increase of loan instalment over the payroll ratio• Number of months with any overdraft, exceeded• Negative trend in behavioral scoring• Negative trend in probability of default and/or internal rating

Early Warning Signals Retail Portfolio

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No

Yes

Example of Early Warning Approach

Early Warning Policies

Independent Quality Assurance of early warning/watch-list process

Back Office Front Office NPL Units

Quality Assurance and Control

Internal Data

External Data

Early Warning Engine

Issue Tackled?

Alert Closed

Early Arrears/NPL Process

Other alerts (eg based on client

Automatic Alerts in front office

Timely actions taken by Relationship Managers

Early Warning Process

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The Early Warning Approach diagram shows a generic early warning process including different steps and parties involved

• Early Warning engine owned by back office• Early Warning alerts managed by front office• Potential hand over to NPL units in case of deteriorating credit quality• Quality assurance and control via second and third lines of defense

Each step should have clear owners with adequate reporting and escalation processes and procedures.

Early Warning Indicators (EWI) should be suitably developed for each portfolio. The computation of EWI should at least be monthly although for certain specifics like industry/segment/portfolio or borrower level, updates might be available less frequently.

Early Warning Systems

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InnovationHistorical data (Quantitative) and Market data (Qualitative) collected over time plays a large role in providing trend, forecast and alerts.

Where possible, deployed Early Warning Systems should have capabilities such as • Machine Learning (ML)• Artificial Intelligence (AI)

They should also have high configuration for;• User Interface (UI) and • User Experience (UX)

Regulators are keen for banks to edge towards innovative Early Warning Systems.

Early Warning Systems

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• A lender’s risk continues until the borrowing is fully repaid

• Regular monitoring and control is necessary to spot the early warning signs which will indicate whether or not a good account is about to turn into an expensive write-off.

• The earlier the problems are identified, the sooner corrective action is taken inorder to avoid build up of NPL’s

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Debt Restructure

Non-Performing Loans Management

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New Approaches adopted by banks in NPL managementCentralized Approaches

Corporate Debt Restructuring (CDR)

Corporate Debt Restructuring (“CDR”) mechanism is a voluntary non statutory mechanism under which financial institutions and banks come together to restructure the debt of companies facing financial difficulties due to internal or external factors, in order to provide timely support to such companies.

The intention behind the mechanism is to revive such companies and also safeguard the interests of the lending institutions and other stakeholders. The CDR mechanism is available to companies who enjoy credit facilities from more than one lending institution. The mechanism allows such institutions, to restructure the debt in a speedy and transparent manner for the benefit of all.


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New Approaches adopted by banks in NPL management

The objects of the CDR mechanism

The objects of the CDR mechanism


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Centralized Asset Management Companies are usually set up via Co-operation between the Government and Industry players (in this case banks)

Proponents of Centralized Recovery Routes• Consolidation of skills and resources thus more efficiency in recovery• Centralizes ownership of collateral – potentially giving more leverage over the debtor• Distressed loans are removed from the banks within shorter timelines with NPL relief felt within acceptable

financial reporting cycles.• Breaks the ‘reluctant relationship’ between a distressed debtor and the bank enabling the centralized agencies

to collect and/or cure the distressed assets better and faster. (ECA effect)• The flip side of the coin however is that they can be vulnerable to political machinations where state owned

corporations’ debts are transferred.


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Decentralized Recovery RoutesInvolves establishing work-out units or recovery units within the bank. Work-out units can also be established as a subsidiary of the bank and are commonly referred to as “bad banks”

Advantages of Decentralized unitsi) Institutional memory since the bank already has a relationship with the debtor and has “held” their file

since loan approvalii) With NPL sitting on the bank’s balance sheet, there is incentive to maximize recovery efforts and to

improve credit initiation and credit monitoring to avoid/mitigate/reduce future losses.iii) Banks can provide additional funding as a restructure produce whereas centralized AMC’s cant.

Main Disadvantagei) Lack of sufficient skills and resources to ensure maximum and intense coverage of NPL’s


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What Restructure Products are available for banks?i) Setting up New Payment Schedulesii) Interest Holidaysiii) Deferral or Extension of Principal and/or Interest Paymentsiv) Capital Holidaysv) Interest &/or Charges waiver or capitalizationvi) Top-upsvii) Terming out of hardcore Overdrafts.viii) Out of court settlementsix) Auctionsx) Receivership/Insolvency Administrationxi) Debt Consolidationxii) Debt Sale (External or Internally to sister companies)xiii) Bankruptcyxiv) Credit Guarantee Funds


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i) New Payment Schedules Restructures:

This involves varying the repayment schedules from the original agreement to reduce the instalment amount by extending the tenor. The new instalment amount is set to match current cash flows with the underlying expectation that operations will pick up and the debtor will meet full obligations. Sometimes after a down turn the debtor might opt to accelerate their repayments in an effort to revert to the original agreement.

The process involves re-assessing the borrowers financials and re-writing the facility under a new agreement.


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ii) Interest Holiday or Moratorium

This restructure product allows the debtor to service principal only for a specified period after which he resumes servicing both principal and interest. Although this improves a borrowers liquidity and may translate to improved future performance, it’s a delicate balancing act since it directly affects interest income.

Keen monitoring and preferably automation is required to ensure that the facility reverts back to interest earning once the moratorium period expires.


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iii) Deferral or Moratorium on both Principal and Interest

Extensions or deferrals on both principal and interest are common where the borrower is in temporary financial difficulty. A permissive policy of extensions and deferrals on both principal and interest can easily cloud a banks portfolio outlook. However when used prudently and based on recent satisfactory performance and certifiable improvements in other credit factors the product can give relief for deserving borrowers.

Just like the other restructure products discussed earlier, the structure of deferred products should be clearly set in the NPL policy and proper approval should be documented.


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iv) Capital Holidays

This product is similar to interest holidays but here the debtor services interest only and gets a moratorium on principal for a set period of time. Once the borrower finances improve the original loan terms are reverted back to.

Again close and keen monitoring is required to ensure that once the principal moratorium period expires the loan reverts back to the original agreement.


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v) Interest &/or Charges WaiverBanks may capitalize accrued interest and charges. In MRA circular dated Feb 2018, this is one of the suggested quick kills to curb high NPL ratios in Tanzania. The alternative to this product is to write off accrued interest and/or bank charges. However this option is best used where the debtors financial recovery is almost certain

vi) Top – UpsAdditional facilities may be granted to bad debtors where the bank is certain that the underlying business is still viable and will make an up-turn. Common practice is to partially disburse the top up amount while monitoring business performance.

This restructure product is commonly used for project finance facilities where budgets and/or costs have over-run.


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vii) Conversion/Term OutsDistressed overdraft borrowers may negotiate for their facilities to be termed out i.e. converted into Term Loans. The debtor then benefits from extended tenors (considering most OD’s expire annually or every two years) and reduction in penalties and interest associated with Overdraft excesses.

viii) Full and Final (Discounted Settlements)This product suggests giving discounts to debtors who wish to settle their outstanding facilities in full. The settlement may be in form of a single bullet payment or staggered over a short time. Most institutions will add a clause which denies the discount if the debtor deviates from the agreed settlement plan.


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Write Offs are an essential to clean up the Balance Sheet of uncollectible debts. Homogeneous criteria for writing off NPL can result in important perceived differences in terms of asset quality. As long as an NPL even fully provisioned is maintained on the balance sheet, NPL ratios as well as coverage ratios are affected. Sometimes high NPL ratios are characterized by large parts of those NPL consisting of fully provisioned balances that have been outstanding for long periods and that are not written off for legal, judicial, tax and sometimes regulatory reasons.

According to WB, “in a particular country once the receivable was written off the banks Balance Sheet, a judge declared the claim did not exist anymore”

Its good practice to write off fully provisioned NPL’s – Require the Board to meet periodically to review the NPL portfolio


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Credit Guarantee FundsMost Government’s response in light of Covid-19 especially for MSME’s

Governments provide partial or full guarantee to loans in certain key sectors:• The decisions are delegated to the lender• No automatic right of approval and the borrower must meet the terms and conditions

set by the lender.• The underlying business usually has to be viable. In most cases conventional security has

be used first.• Drawn monies may not be used for investment funding


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Credit Guarantee Funds

Some of the criteria set for Credit Guarantee approval for MSME are:• Full year turnover is set to “X” so as to lock out larger companies• Cap on interest rates• Tenor is set at “X”• Moratoriums are given from the day of drawdown• Term out of OD’s to release capacity

Challenges• Requirement for additional conventional security including personal guarantees

being met with resistance in most markets• Attitude of “free government money”• Accurately establishing who rightfully qualifies for the funds or whether the business

will be viable once the moratorium expires

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