Business in Distress Once Again
Introduction
Guyana is a remarkable country. We never seem willing to address an issue
until it becomes a problem and never to address a problem until it becomes a
crisis. And not unusually, we still apply the wrong remedy.
Over two years ago, a group of persons led by accountant Mr. L.P. Singh
met at his office to discuss what he described as the crucial situation
facing businesses. Business Page followed this up with a two-part article
and revisited the subject some time later. It therefore looks like deja vu
once again to read that the Private Sector Commission and the Guyana
Association of Bankers "are working on a strategy to deal with the
issue" and has appointed a task force to develop a concept paper to
tackle the situation and provide relief to businesses in distress.
Of course two years after Mr. Singh's initiative, the situation facing
businesses is now infinitely worse. After seven years of continuous growth
averaging around seven percent (7%) per annum, the economy recorded a
decline of 1.3% in 1998 against a target growth rate of 3.2%. This was
followed by a 3% growth in 1999 but in 2000 the economy again declined, this
time by 0.8%. The contraction in the economy has coincided with the coming
into full force of the Financial Institutions Act which has forced banks to
pursue much stricter prudential policies particularly in relation to loan
provisioning. The combination of these factors has had a devastating effect
on businesses many of which had serious underlying problems which only
surfaced in the more difficult economic conditions and after pressure from
their bankers.
Crisis
There are reports that over six hundred (600) firms have been taken to
court by banks in an effort to recover the substantial sums which prior to
the FIA would normally be rolled over from year to year. GMA President Mr.
Norman McLean was quoted as describing the situation as "a national
problem of crisis proportions" which no one seemed to be taking
seriously. Clearly the legal action by the banks suggest that they at least
regard the situation as serious and that they would do everything to protect
their depositors' funds. In many cases however the action may be far too
late. Some banks and other financial institutions are now themselves
admitting that the problems may be deeper and more serious than anyone has
been prepared to admit so far. Rumors are rife that some of the smaller
financial institutions could soon face real difficulties as the Bank of
Guyana seeks to enforce the FIA sandwiching them against customers strapped
for cash and therefore unable to meet their payment obligations. The outlook
for the economy for the rest of this election year is at best modest with
continuing political uncertainty, depressed commodity prices, increased job
losses, accelerated outward migration and concerns about management and
governance. The strict application of the FIA could only exacerbate the
situation as financial institutions are forced to pursue their debtors. The
dilemma which policymakers face is that prudential banking which the FIA
represents is not for the good times only but to protect the sector from
danger at all times. As one banker said during the week, the FIA was long
overdue. He suggested that many of the difficulties which the sector now
faces were caused by the transitional arrangements allowed under the FIA
which gave the lending institutions up to four years to bring their
provisions within the guidelines of the Act.
Averting the Consequences
Of course all of this is history and what the private sector and the
bankers are now seeking to do is avert more businesses going under with
consequences for employment, social and economic stability, government
revenues, property prices and the financial results of the commercial banks
and other financial institutions. The fragile political conditions demand
that this scenario be prevented at all cost and it will therefore require
effort and compromises by every player.
Other than waiving the conditions set out under the FIA for rescheduling
of debts, the Government has taken, no doubt to avoid creating any
precedent, a fairly hands off position as we have seen in the case of
certain rice farmers, GA 2000 and most recently and perhaps significantly
Globe Trust which during the week announced the suspension of operations.
The Minister of Finance, the Governor of the Central Bank and the IMF
Resident Representative are all convinced that the Globe Trust situation
will have no impact on the rest of the financial system. They reason that
the banks are all very liquid and possess the resources to meet any unusual
demands from depositors.
Only one of the country's commercial banks has made any public
pronouncement on its recognition of the plight of its customers. As Business
Page noted some weeks ago, the Guyana Bank for Trade and Industry has
rescheduled some $3 billion of loans to rice farmers. If other financial
institutions have done the same for their customers, they have made no
public statements on the issue.
The case of the borrowers has been fairly mixed with some of them seeming
to defy their bankers while others have simply walked away from their
businesses leaving the banks the messy task of trying to unravel the
problems and realizing their security. The whole saga has underlined the
poor state of financial management in several of these businesses and the
inadequate supervision exercised by the banks over assets taken to secure
their lending.
Hands Off Policy
While the problems in Globe Trust may be due to reasons other than the
difficulties facing businesses, the Government must review its hands off
policy which can so easily be misunderstood and which can exacerbate the
situation. As businesses fold not only their bankers but their other
creditors as well will no longer be able to collect amounts owing to them
leading to a huge cash crunch. In the worse case scenario the domino effect
will come into play and more and more businesses, through no fault of their
own, can fail. So what can we do?
This situation does not lend itself to easy solutions since at least some
of the problems are external to the businesses as is the case of the wood
and rice sectors. Only a few days ago, Ms. Mona Bynoe, Executive Director of
the Forest Products Association, while making the case that the timber
industry is facing serious problems, called for a Marshall Plan not only for
timber but for rice, bauxite and mining as well. The financial condition and
the various commitments by the Government under international agreements
severely limit its ability to provide financial support to rescue any
industry or entity.
Cash of course is not the only problem. Many of these businesses have
been badly managed and are beyond help. The best thing for them is to accept
the inevitable and try to sell the business as a going concern. The problem
here is that invariably the lender, which in most cases means the bank, has
taken the entire business as security and the owner derives no benefit from
trying to salvage the business. Notwithstanding this, the Government has a
duty to act to prevent a further deterioration in the situation. We have had
ample evidence, if such evidence was necessary, to convince us that doing
nothing is usually a very costly option. On the other hand, wholesale
foreclosure could simply mean that the bank ends up more in the real estate
business than in banking, clearly an undesirable situation. Ironically,
foreclosure may actually result in the bank receiving less money than if it
had continued nursing the business along and waiting perhaps for an
improvement in the economic conditions or a more appropriate time to move
in.
Recommendations
One of the first tasks of the task force will be to identify the
businesses in distress, separating those which are beyond redemption from
those which with some understanding from their bankers and more responsible
and better management can be salvaged. It will require concessions and
compromises from all parties including employees who may have to take salary
cuts in the interest of preserving their jobs. It will also require that
each loan be looked at separately.
Business Page does not recommend the easing of the rescheduling
conditions of the FIA merely to make the bank's financial statements look
good or to prevent them moving against their debtors. The debts owed to the
banks by most of these businesses would have been fully provided for anyway.
Those debts should remain that way with all repayments taken to the income
statement until there is reasonable certainty that the loan has been
restored to good status.
Specifically Business Page recommends the following:
The Banks - they should be prepared to write off a significant portion of
the accrued interest, capitalizing the balance and establishing a new loan
principal with fixed periodic repayment over a reasonable term. They should
also discourage overdrafts which borrowers have proven signally incapable of
managing.
The Government - in view of the serious economic and social consequences
arising from wide scale job losses and business closures, the Government
should be willing to consider exempting from corporation tax and of course
the minimum corporation tax any sums recovered under this scheme. Had those
businesses folded, there would have been little income anyway. Government
must also indicate its commitment to the cause by associating itself with
the work of the task force.
The Business - many businesses have been less then honest with their
bankers and possess assets outside of the reach of the lenders. In return
for any form of support or relief, businesses must be prepared to operate
more honestly and offer adequate security to cover the revised indebtedness.
They must also be prepared to submit themselves to closer supervision by the
lenders.
Conclusion
As a conclusion to this piece, Business Page simply repeats what it said
over two years ago. Business Page supports the BID (Businesses In
Distress) initiative in the interest of the national economy. We already
have too high a level of unemployment and social tensions and closing down
businesses and sending home workers is clearly not in the nation's interest
at this time. The private sector also makes a very strong point when it
suggests that it see absolute logic in debt relief for businesses if debt
relief of the country is justified. Private sector entities cannot be
accused of mismanagement as though this has somehow not happened at the
national level. Support however must come at a price: businesses must be
prepared to change their bad habits and prove in advance that they can
henceforth operate at an acceptable level of efficiency.
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