Magazine article Management Today

Credit Where It's Due

Magazine article Management Today

Credit Where It's Due

Article excerpt

Banks are no longer fixated by assets. So what do they look for these days when considering how much they should lend?

'Ten years ago - and perhaps not quite so long ago as that - it was a matter of ascertaining that the assets were there to back the loan. We didn't ask too many questions about where the repayments were coming from. It was pawnbroking,' says a Big Four business manager. 'If only it had been,' rejoins a Big Four senior banker. 'At least the pawnbroker is sensible enough to lend only a fraction of what the asset is worth. And he won't accept an asset unless it is highly liquid.'

The lesson has been learned, however, and according to the banks, recent years have seen a revolution in the way in which they deal with business customers. No doubt there are still a few pawnbrokers lurking around, but in general the banks these days recognise that when they're providing a loan, they need to look at the business as a whole, not just its balance sheet.

The revolution goes further: banks are trying to be less arrogant. Says the same senior banker quoted above, 'Five years ago, we'd have said to a prospective borrower, "And send us management accounts every quarter. We want them within 10 days of the end of the quarter. In triplicate." Not now. We still want the accounts, although we tend to manage with one copy. But we have a genuine discussion about why it's in both our interests for us to have them. We used to have management courses about accruals. Now we have courses about how we behave.'

Of course, the vast majority of business borrowers are very small businesses. At Barclays, hairdressers, fish-and-chip shops and anyone else who can get by with less than [pounds]50,000 of total borrowings is looked after by Small Business Services. That's 2,000 people spread across the high-street branch network. This is a mass-market business, calling for straightforward systems and controls. 'You've got to keep it simple,' says David Lavarack, head of the division. 'In essence, it's a matter of one and a half times interest cover, and are they repaying on time?'

Lavarack's opposite number in the 'mid corporates' market - defined as borrowings of [pounds]50,000 to [pounds]100 million - is David Weymouth, director of Corporate Services. Here, it's more sophisticated. Borrowers are dealt with by teams comprising a leader and, say, five managers and five assistant managers. Staff get more specialised training than they used to and have a lot of information at their disposal. 'We have developed our industry information beyond all recognition,' says Weymouth. 'We have tried to equip managers to understand the different risks in the different sectors.'

In order to assemble the sectoral knowledge, Barclays, along with Lloyds, has introduced Lending Adviser, a US software package which amalgamates on a centralised basis all the bank's business loans and borrower performance information to give an overall view of how any particular sector of the economy is faring and to establish the bank's exposure, industry by industry. Lending Adviser also analyses individual loan propositions, comparing them with norms for individual industries, and telling the manager which ratios to emphasise in which sectors.

An example of this greater sophistication is Barclays' follow-up on the collapse of the Net Book Agreement in 1995. The move altered the economics of the book trade, especially so for independents competing with a local Waterstone's. Lending Adviser told Barclays where it had bookshop customers and provided an immediate profile of their borrowing. The system enabled required ratios to be stiffened for new business and performance monitoring of existing business to be sharpened. After Dunblane, Lending Adviser was directed to sift out Barclays' gun shop customers. It turned out there weren't any.

Part of the banks' reappraisal has led to a fundamental switch from overdrafts to term lending. …

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