Debt rescheduling damages enterprise viability

JEROME MUTUMBADEVELOPMENT Bank of Namibia (DBN) loans to enterprise are made with the mandate of the bank in mind: to provide capital to enterprises that have a developmentally beneficial impact, particularly through creation of employment and development of infrastructure.

However, the bank also has a duty to recover its capital from borrowers as the capital and interest repayment are then extended to other borrowers, who multiply development impact.

In order to secure the long-term viability of emerging enterprise, the bank took measures to allow for debt rescheduling in the event of difficult operating conditions, particularly weather phenomena, such as major flooding which prevented northern enterprises from operating, and heavy rains which prevented SMEs from reaching payment milestones while completing infrastructure tenders.

The primary purpose of rescheduling has been to ensure that enterprises continue delivering development impact, even though payments may be delayed. The secondary purpose has been to ensure that collateral, particularly in the form of fixed property is preserved. In the latter regard, the bank actively seeks to prevent bankruptcy and its impacts on families, employees and communities.

Regrettably, there is a small number of entrepreneurs who abuse the concession of debt rescheduling, even though they have the ability to repay loans.

Delays in scheduled repayments, in spite of the ability to make repayments, indicate that the borrower is redirecting financial resources in spite of commitment to the terms of the loan. This can have two causes: personal expenditure and expenditure on other enterprises.

Both types of expenditure, at the expense of repayment to the bank, extend the period of repayment.

Rescheduling also increases the accumulated interest due to the bank. This places the enterprise at a disadvantage in the the long term by reducing long-term profitability, and growth potential of the enterprise.

In the case of personal expenditure, the bank counsels individuals not to make drawings against profits, but to provide for salary in the cash-flow projection, and preserve as much capital in the enterprise with the goal of long-term personal wealth through long-term enterprise growth.

If the borrower seeks rescheduling to avoid repayment, that borrower risks the bank’s caution, and possible delays, or even a refusal, in the event of a requirement for rescheduling based on serious circumstances in the enterprise environment.

An additional potential burden to the unwilling payer is that the bank may assign a higher risk rating to the borrower in future if a second loan is requested, place more restrictive conditions if an additional loan is requested or assign a higher interest rate.

The bank has put in place several mechanisms to reduce the phenomenon. These include ongoing monitoring of repayment, better management of collateral held by the bank and enhanced collection. As a result the cost of lending by the bank has increased.

Reluctance to repay loans in the manner stated in agreements is a twin expense to the bank and the borrower. The bank counsels that borrowers who are reluctant to repay consider the cost to themselves in particular, and not avoid repayment for personal spending or short-term enterprise opportunities.