Page 35 - Banking Finance August 2019

ARTICLE

happened in the recent past be it Satyam, Sahara or
Kingfisher Airlines, the frauds were perpetrated by "window
dressing the financial statements" and "doctoring the key
financial parameters of the company'.

In this "situation of crisis" how bank's can take a better
credit decision? What strategy must the banks adopt while
lending? The answer to this question is "Focus on Cash".

We all know that it is the "Cash" which is the going to repay
the loan, so banks must focus on the source of loan
repayment i.e. "Cash".

The profit & loss account statement is based on accrual
Financial statement & records: The assessment of credit method of lending i.e. it takes into account the transaction
limit is done based on audited financial statements and
which has occurred during a particular period but it do not
estimated & projected financial figures submitted by the
provides information as to if the cash is actually received
borrowers, Income tax return etc. Too much dependency
from the transaction or not. Company reports a sales of Rs.
on such statements also leads to a myopic credit decision. 1 Crs in its Profit & loss account as on 31st march 2018. On
Recently several instances of fraud are hitting headlines of 1st April 2018, the firm showed sales return of Rs. 90 laces
newspapers at a frequent interval, several questions are (out of Rs.1 cars already reported) and out of remaining Rs.
being raised by "diktats" regarding the sanctity of the 10 lacs (Rs.1Cr - Rs.90.00 lacs), it is not clear from the profit
audited financial statements and other data furnished by & loss account as to what amount of cash is actually received
corporate borrowers based on which the credit decision is by the firm.
taken by the banks.
To overcome these challenges, banks are focussing more on
Moreover, these records & statements acts as documentary "Cash flow statement" and cash-based lending techniques.
evidence of the past performance of the loan applicant but In the cash flow lending method, the net cash flow
it do not guarantee that future performance will be in line generated from the business is the determining factor for
with the past trend. Another major challenge in the "Paper the loan amount, loan tenure, periodicity of repayment. This
obsessed lending" approach is that many small - unorganised method is also considered as an appropriate strategy for
& unbanked segment are excluded from the formal sources lending to MSMEs given that non-availability of collateral
of credit as they do not have the ability and required skill to security by these borrowers.
prepare and submit the financial documents for loan.
Some of the instances where cash flow have been the key
Changing Business scenario: With the advent of parameter of lending are lease rental discounting,
technology, the business models are also changing rapidly. warehouse finance, supply chain finance, value chain finance
The young entrepreneurs are leveraging digital dividends etc. These methods are suitable for large corporate lenders.
and minting money through app based business platform. On the other hand, for small unorganised borrowers also,
As a result the traditional credit assessment methods like the new age fintech companies have devised cash lending
MPBF methods are slowly becoming obsolete. products like Merchant cash advance, loan against card
swipes etc.
The "one size fits all" approach should be avoided and banks
must explore alternate methods of assessment based on the In the cash-based method of assessment the
emerging new age business model. major role of lender will be to ascertain the
following:
Alternate Lending Model: Source of cash flow: Cash flow from the core business
If we analyse the instances of corporate frauds which has operation of the borrower should be the major source of

BANKING FINANCE | AUGUST | 2019 | 35