2024! ARE THE METHODS OF EVALUATION BY FINANCIAL INSTITUTIONS TOO STRINGENT?

THE QUESTION:

Dear Khugan,

I have been rejected by my Bank twice in the last 2 years, in spite of having projects and not defaulted in my current loans with them. They take very long to give a straight answer and as a customer it is very annoying. That brings me to my question. What is the financing evaluation process for banks and why is it so stringent lately? After all, if they don’t help businesses grow, then how can we repay existing loans??

Adrian. T

(Kuala Lumpur- Malaysia)

THE ANSWER:

Hey Adrian, Thank you for your email! Though I have touched on this matter in some of my other articles, I would do it once again, just for your sake, and I am sure for thousands of others, who are going through the same situation. The problem is that most banks in Malaysia today have developed a different Client Evaluation Systems (CES). The following are the basic criteria that needs fulfilling, which is possibly why their process has become more stringent lately.??

1.?? RISK ASSESMENT:

Banks conduct a stricter Risk Assessment to evaluate the potential risks involved with the business. This includes credit risk, market risk, operational risk, and other factors that could affect the business’s ability to repay the loan especially after the Covid-19 Pandemic.

Stringent credit requirements often mean that SMEs with shorter credit histories or unstable financial records find it difficult to secure more loans. This unfortunately limits their ability to invest in growth, innovation, and scaling operations, as the processing usually fails the Risk Assessment Criteria.

2.?? OPERATIONAL CHALLENGES AND CASH FLOW ISSUES:

Banks take the Debt Servicing Ratio (DSR) of their clients more seriously lately. They require a detailed financial projection, including income statements, cash flow statements, and balance sheets to show that the business has the ability to undertake the new projects/ operations of the company as these are deemed critical. Banks look for realistic and well-supported financial forecasts that show the potential of the profitability of the business, as that would ensure the ability to service the debt.

Banks have introduced a more Stringent credit requirement in 2024, as cash flow problems, can make it difficult for SMEs to cover operational expenses, payroll, and inventory costs. This has in many cases, led to operational inefficiencies, delayed payments to suppliers, and even business closures which has been rampant in 2022 and 2023.

?3.?? ALTERNATIVE FUNDING CONFIRMATIONS:

This year, banks have become more investigative in processing loans. Sometimes, a customer may have a good track record with Banks, but they also might have concurrently taken Alternate Funding and have thus increased their gearing ratio.

Most business owners especially SMEs will seek alternative financing sources, which can be more expensive than traditional bank loans. Though most of the time these financial arrangements are not shown in the Credit Reports, most banks have ways of discovering these loans. As this can lead to higher overall financial costs for the customer, it potentially leads to a riskier financial assessment by the banks.

Well Adrian, in my conclusion, Banks' evaluation of SME business Applications involves a comprehensive assessment of the business’s viability, financial health, and management capabilities. Understanding the above systems can help SMEs better prepare and work according to the banks requirements more effectively. I hope I have shed some light to your query on the matter.

If you need other clarifications, please do not hesitate to email /WhatsApp me. Once again thank you for the E-mail.

Best Regards Always,

S. Khugan