WITH HIGH NON-PERFORMING LOAN (NPL) RATIOS FOR 2022 & 2023, WHAT CAN BUSINESSES EXPECT FROM FINANCIAL INSTITUTIONS IN 2024?

Please Note: The following is my personal opinion based on my experience in similar situations in previous years. This should help Businesses understand how to structure their Fund-Raising requirements for 2024 based on the company’s performance for 2022 and 2023.

Non-Performing Loan (NPL) ratio of previous years can create challenges for businesses that seek capital from Financial Institutions in the present. Non-Performing Loans are those that are in default or close to default, where the borrower has not made interest or principal payments for an extended period.

When a Financial Institution has a high NPL ratio, it indicates a higher level of risk and potential financial strain on the institution. Here are some anticipated problems businesses may face when dealing with Financial Institutions.

1.?? TIGHTER CREDIT PARAMETERS - Financial Institutions are likely to respond to a high NPL ratio by tightening their credit criteria and parameters. They become more cautious and conservative in assessing the credit worthiness of new borrowers. Businesses may find it harder to meet the more stringent criteria for loan approval.

?2.?? HIGHER INTEREST RATES – This is tougher to deal with. Financial Institutions may choose to charge higher interest rates to compensate for the increased risk associated with lending to businesses. This could result in increased borrowing costs for companies, making financing less attractive or affordable.

?3.?? REDUCED LENDING APPETITE – We have witnessed over the years that Financial Institutions with a high NPL ratio become more risk-averse and conservative in their lending practices. They usually limit the amount of new loans they are willing to extend, reducing the overall availability of credit for businesses.

?4.?? CHANGES TO COLLATERAL ARRANGEMENTS –Financial Institutions demand more substantial collateral to secure loans, as a way to mitigate the risk associated with lending. This can be challenging for businesses in this economy, particularly smaller ones, that may have limited assets to pledge as collateral.

?5.?? A MUCH LONGER APPROVAL PROCESS – Financial Institutions may add more layers of Management Approvals, where they need to conduct more thorough due diligence and assessment processes, leading to longer approval times for new loan applications. This can be very challenging for businesses that require timely financing to seize opportunities or address pressing financial needs.

?6.?? LOW RISK SECTOR PREFERENCE – Usually the primary step most Financial Institutions take is to prioritize the lending to sectors or industries perceived as lower risk. Businesses operating in industries with a higher perceived risk may face greater difficulties in securing financing, as they will come under Non-Preferred Industries or sectors.

The Typical Financial Advice is to navigate these challenges, businesses should focus on maintaining strong financial health, improving their creditworthiness. However, I understand it is difficult for these possibilities seeing the current economic conditions.

So, My Advice Is: Look at your documents and understand your company’s actual financial health and see exactly what is the Fund-raising exercise that your company is eligible for? Then focus on the direction that is required.

If you need advice on the said directions of Fund-Raising options, please do not hesitate to email /WhatsApp me.

Best Regards Always,

S.Khugan