BANKS-CORPORATE CUSTOMERS' RELATIONSHIP
Apr 5 - 11, 2010
Banks are the prime source of credit to the corporate sector. Relationship between the two sectors in essence revolves around the functions of lending and borrowing. Corporate customers can hardly be visualized by the banks as a deposit mobilizing source for the simple reason that the businesses themselves are on the look out for cash to carry out their existing operations and to finance modernization and expansion to survive in a highly competitive market environment.
The major portion of bank deposits comes from the household savings. The second tier source is the institutional deposits for example insurance and pension funds etc. The corporate sector being in the thick of the things is more cost and price conscious than a household saver who primarily focuses on the safety of his money besides a reasonable rate of return. On the other end, the businessmen are more interested in the liquidity and earning capacity of their money.
We can not expect a corporate CFO to keep a huge sum of money in company's bank account and sit back. The specter of working capital finance keeps him on his toes and he ever remains busy in drawing cash flow statements and takes preemptive measures to forestall any liquidity crunches. Any seasonal sales fluctuations resulting in higher cash inflows are taken care of by investing excessive cash in short term securities that yield a return higher than the banks' saving deposit rates.
Since banks invest a major portion of their deposits in business and industry loans, it is the job of the corporate banker to understand the nature of relationship with its corporate customers who are making use of his bank's money. After fully grasping the nature of this relationship, he should draw a credit monitoring plan. The business credit may take various forms that may include unsecured overdraft, secured overdraft, demand finance, bills purchase and discounting facility, letter of credit, letter of guarantee, loan against imported merchandise etc. Credit monitoring phase starts immediately after the process of disbursement is completed and this is the point in time when the ball is in the court of the corporate banker.
In most of the cases, the corporate banker might observe a marked change in the behavior of the corporate team members who may not appear as cordial as they used to be during the course of credit negotiation. But a seasoned banker brushes this notion aside and concentrates on his job of monitoring.
The basic document in the monitoring design is the statement of borrowings and maturities. It is imperative that the corporate borrowers are intimated well before time about the payments falling due in the immediate future. A telephonic talk, a polite letter or a courtesy visit can be used to keep in touch with the borrower and to apprise him of the approaching maturities. It is also the job of the banker to get as much market intelligence about his borrowers as possible. The sources of this intelligence could be the competitors, other bankers, stock exchange in case of listed companies, and company auditors. The first hand information might well have the element of distortion, but it is the job of the banker to find out the truth through cross examination and personal verification processes.
The business pages of newspapers and company's periodic financial accounts are valuable sources of information about the well being or otherwise of a company.
In case the borrower is a listed company, the corporate banker would do well to make periodic visits to the stock exchange. The trade volume of company's shares and market price fluctuations will betray a great deal about company's health. This information can also be had through business pages of certain newspapers, but a personal visit to stock exchange will enable the banker to gather and objectively analyze off-the-record information about the company that might come direct from the mouths of stock brokers or common investors engaged in buying or selling company's shares. He might hear of a scandalous deal company entered in to or a sell-off or a take-over rumor circulating in the corridors of stock exchange.
A sudden upsurge or an abnormal drop in the trading volume of a borrower company's shares should spur the banker on to knowing the underlying reason. Similarly an abnormal rise or drop in the market price of a company's shares should stir the inquisitive mind of the corporate banker. A more than average increase might indicate the involvement of speculative forces, while an abnormal drop in prices might be the result of some adverse development in company's operational or management affairs. An abnormal change in trading volume or the market price of shares might generate rumors on some proposed merger, acquisition or spin-off. In either case, the banker should make investigations and prepare a report for the higher management.
The periodical financial statements of the borrowing company should give the banker a deep insight into the affairs of a company. Overtrading and over-capitalization can be detected through analysis of company's balance sheet, particularly the current liabilities and current assets section. The cash flow and fund flow statements will give a fair view of company's ability to timely meet its loan obligations. The income statement, besides highlighting company's profitability aspect, will also determine the business's capacity to pay bank interest charges.
From liquidity point of view, a close examination of company's current liabilities and current assets is of great importance to a banker. The comparison of these two items of company's balance sheet might reveal either a state of over-capitalization or a case of overtrading. When too much is invested in current assets - excessive idle cash, rising volume of inventories and mounting receivables - the business is said to be overcapitalized.
The size of current assets is much higher in comparison to the size of the current liabilities. This condition will result in a lower profitability to the company. Though not much alarming for the banker, a note of this situation should be made and discussed with the company representatives. On the other hand, the overtrading under which the company tries to do too much too quickly with too little long-term capital is certainly of concern to a lending banker. A company in this situation might well appear doing alright and earning profits, yet it may land itself into trouble any time to undermine its ability to pay debts as they fall due. The lending banker should take a serious view of this situation and share its apprehensions with the top executives of the borrowing company.