Page 251 - A Banker Down the Rabbit Hole

cage of iron bars in the open area of the factory premises in which about
more than a dozen big drums were stocked. The lock on this cage looked
rusted for long. I enquired about the material in these big drums. They
informed that this was the main chemical used in the production. They also
advised that this lot of chemical had a problem of quality and is to be returned
to the supplier. On asking they informed that it cost about Rs. 1 Crore.

I immediately got to know that substantial amount of funds got blocked
in this disputed unusable raw material for about 35% of their working
capital needs. Hence, they were not able to operate even on the current
year level of production. Their existing banker might not be convinced
about enhanced working capital limits based on current level and they
might not be convinced about sudden excessive jump in production and
demand of product as projected by them. Hence no enhancement in
credit limits might have been approved by them.

We also had no past experience of dealing with them. We knew that
demand for the product was there but there were also many other
reputed players competing with them in this crowded industry. The
probability of 200% jump in projected turnover was meant to get excess
finance to overcome the financial constraint due to huge sum locked in
disputed material. Moreover, there was a little activity indeed for several
months in the factory which they tried to hide from us.
We insisted on granting the same level of limits as their earlier bank with
adequate collateral. They did not show further interest in pursuing for
the approval.
Insights from the episode

1. All round vigilance, alert observation and market information is the
key to discover true position of the affairs of the borrower company.
2. A borrower not truthful and transparent with the banker is usually
hiding some major deficiency in operations or financial transactions
and is not trust worthy and thus credit worthy for the bank loan.
The bank deserves to know the true position more particularly when
the banker lends more than borrower's stake in many cases.
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248 | A Banker down the Rabbit Hole