So tomorrow sees the publication of the green paper on banking. This will undoubtedly see an element of bank bashing as well as proposals to try and force the banks into increasing their lending.
Whilst I have some (albeit limited) sympathy with the banks I do believe that they have to step up their game if they are going to play a meaningful part in pulling the economy out of the mire and that they won’t do this quick enough in the absence of suitable carrots and sticks being put in place.
When it comes to small and medium size businesses banks do not understand risk, hence the oscillation between over-lending in good times and under-lending in bad times. This is not just my cynical view but one shared by a number of senior bankers I know.
Only a few years ago, the banks were hood-winked into ridiculous leverage multiples by the (smarter) private equity community and fell into it hook line and sinker – putting their balance sheets at risks for thin margins, whilst the PE houses took all the upside. Everything was going so well that it would have taken a brave person in the credit department to reject any applications and slow down the sales efforts that were driving senior bonuses.
Now the pendulum has swung completely in the opposite direction and it takes a brave individual in credit to approve an application and a brave relationship manager to contest a negative decision.
Consequently, linking senior bonuses to lending criteria (combined with tight liquidity measures) might just be the answer to the current situation, ensuring a sensible balance between the drivers of overly aggressive and overly cautious lending.
As I mentioned at the start of this blog, I do have some sympathy with the banks and it is important that businesses forget about the ease in which they could access credit a few years ago. Times have changed and banks are being more rigorous in their assessment of opportunities. Robust business plans, sensible financial projections that withstand due diligence, clear management information are all essential to raising new finance (or possibly just extending existing facilities) and it is entirely reasonable for any 3rd party funder to expect this.
Whilst it might take a little bit of extra effort and it might seem like you are playing a game in producing this information in a bank friendly format it is usually worth the effort and even more so in difficult times. Businesses don’t usually worry about being over-prepared for proposals with potential new customers and I would strongly recommend applying this mind-set to your dealings with your bank (or any other potential funder).
The solution to the current crisis won’t come from one miracle cure and will take a number of forces working together so lets hope that the green paper is a step in the right direction.