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The tide is turning -- return of the SME.

Summary: A number of those who had "skipped" have contacted banks seeking restructuring of loans

By Sunando Mukhopadhyay, Special to Gulf News

Dubai: It has been more than a year of distress now for SMEs. Initially led by the tumbling oil prices and softening commodities, the economic slowdown was exacerbated by the China slowdown, the ever strengthening dollar and then the regional conflicts closer home. Weakened demand from Libya and Yemen, compressing trade volume and collection of receivables from several countries got extensively delayed. The situation was the perfect storm that impacted the SME sector, and majority of the issues were beyond its control.

Delayed payments evidently extended working capital cycles, leading to defaults in paying banks, whether it was the monthly instalment or the short term trade finance settlement which resulted in banks shutting off the tap on further money supply, and in the chronic cases, demanding immediate settlement of all dues. This was perhaps the proverbial last straw on the camel's back - the threat of security cheques being banked and looming criminal proceedings catalysed hundreds of SMEs to lock up the businesses, sell down undervalued inventories at whatever prices they could fetch overnight and leave the country.

The fourth quarter of 2015 saw the SME segment suffer and without availability of any figure from a verifiable source, it would not be inappropriate to say that every bank in the country was affected. Suddenly, the value proposition of SME finance looked fragile and several financial institutions had to rework their strategy, with the single-minded focus on recoveries. But it's also true that most banks including Noor Bank, reiterated their firm commitment to the sector despite some genuine worries.

A post evaluation suggests that some of those who "skipped" had always planned to do so, and spent the last few years constructing the perfect escape. But that is certainly not the whole story. While banks enhanced due diligence and the tightened credit parameters, these changes brought about increased awareness about businesses that were facing real distress and needed breathing space.

The correction of the situation started off with the affected banks holding joint financiers' meetings involving the distressed SME owners. More often than not for any SME in question, the first of the series of these meetings would begin with the banks and the owner trading charges about lack of transparency and being uncooperative. Later, the meetings took the shape of consultative and problem solving sessions. Simultaneously, the segment that was worst affected, the foodstuff traders, informally came together to form an association (it is yet to receive its formal recognition though) with the objective of mutual support, cooperation and working with banks to bring the embattled sector back on track.

With these developments as the backdrop, banks formed a cohesive workgroup for the SME & Commercial Banking segment under the umbrella of the UAE Banks Federation (UBF). The committee met on a few occasions before formally adopting a blueprint of a collaborative approach to address the distressed SME collectively, especially those who had established their business vintage.

A technical committee advisory board has been formed to formalise the protocols for distinguishing between levels of exposure among the SMEs and the corresponding solution to the situation. We envisage a solution akin to the bankruptcy law prevalent in many countries slowly taking shape here, which could arguably serve as the foundation for the final legislation. The worst of this cycle is over, although some aftershocks of the shake-up are still evident, and that is inevitable. The first quarter of 2016 and the early indicators of the second reveal that the rate of business owners skipping the country has reduced.

Banks have experienced a number of companies with amounts past due, approach them - to work with them bilaterally, to analyse their new cash flows, and allow them to partly use the existing facilities while rescheduling the existing exposure.

Others affected by tightening of credit parameters have come forward to provide banks with enhanced collaterals requesting for continuation of the facilities, demonstrating the commitment to the business. Several others for whom joint financiers' meetings were held and standstill agreements had been executed have already rescheduled the past due amounts and have started paying periodically in line with the payment schedules. Even others with bilateral agreements have commenced payments to banks.

Perhaps the most heartening sign is that a number of those who had "skipped" the country have contacted banks from foreign locations - seeking reprieve through standstill agreements, wishing to return to their businesses. As a result, banks are in active dialogue with them analysing their business plans and allowing them flexible terms and conditions to return to the UAE and restart their livelihood. Then there are others, who skipped and haven't contacted banks directly, but through consultants, legal firms and powers of attorney holders - trying to route payments from their buyers with somewhat relaxed time frames.

Finally, the good news is that a few business owners that had skipped have already returned and taken charge of the reins once again. It doesn't still placate the situation completely - there is no denying the fact that banks have been impacted and it will take time to recover before confidence returns to the subject of financing the segment.

The SME will continue to remain prone to the turns of the economic cycle. It is therefore futile to expect a hard right turn towards returning to business as usual. Lessons have been learnt and we need to appreciate that SME is a very wide segment and its fundamentals cannot be questioned - the risks are diversified and the rate of recovery also varies. Hence we treat the recent developments as a sign of recovery of the segment and are working actively with other distressed SME owners so that the return to normality is expedited.

(The writer is the Head of Emerging Corporates, Noor Bank. Views expressed in the column are the writer's own and do not reflect those of the bank.)

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Publication:Gulf News (United Arab Emirates)
Date:May 22, 2016
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