Business Page July 22nd, 2001


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.