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Do you know your account could be the next NPA?

Do you know your account could be the next NPA?

The whole India is debating about Vijay Mallya. But he is sitting somewhere in the world and addressing his high debt worries. On the other extreme, there are farmers committing suicide, due to unbearable debt exposure.

In between there are SME borrowers who are the most vulnerable to the debt crisis. Most do not know the implication of debt – its short-term and long-term usage, cash flow mismatch, interest impact and in the case of default all other implications that comes with NPA status.

To understand the dangers of debt, one must understand the intricacies of business finance. Entrepreneurs are happy when they could raise finance from banks or institutions. But the money that comes for business growth, comes at a cost.

Cost is not just interest but the cost of inability to pay interest and debt. The cost of invocation of personal guarantees, liquidation of security and the tag of NPA means untouchable status by all banks and institutional finance. This is a huge cost so much so that people are committing suicide, gone under depression and lose their self-confidence.

Entrepreneurs are by nature enterprising and optimistic. These qualities are important in business. But unreasonable optimism also sometimes kills. Many times when entrepreneurs are advised by finance professionals about their heavy debt exposure and weak financial ratios but the advice is sidetracked under the pretext of undue optimism.

Last week, Mint published Interest Coverage ratio of some of the large companies having huge debt exposure.

Company Interest Coverage Ratio
Jayprakash Associates 0.65
Jindal Steel & Power 1.09
Lanco Infra 0.24
GMR Infra 0.23
Bhushan Steel 0.72
GVK Power 0.31
UB Holding 0.52

Note: Interest coverage (EBIT/Interest)  below 1 indicates they do not have sufficient profit to pay interest on the debt. All borrowers own to the banking system thousands of crores.

When we act in the initial stage, we can salvage and even turn around the business. But at the death bed, salvage and turnaround is very difficult and even if that becomes possible it comes with huge toll. Whether its business or it’s a disease, early action prevents more damage and chances of survival.

In the case of Satyam, Govt acted swiftly and the company was salvaged successfully, but the same yardstick of swift action was not applied in the case of Kingfisher and the promoters were allowed to sink the boat.

For SME entrepreneurs, they have their residential flats at stake, whether mortgaged or not due to their personal guarantees given to the lenders.

To stop fooling around and survive on the basis of mere hope, SME entrepreneurs must make true and fair balance sheet. One cannot be said fit based on fake and manipulated medical reports. The world can be fooled. But own body can’t be fooled by the manipulated reports. Likewise, rating agencies and banks can be fooled, but the biggest casualty of the NPA is the entrepreneur himself and not the banks.

Forget Rs.9000 crs of Kingfisher, but imagine Rs. 90 lacs or Rs, 900 lacs defaults by an SME and the flat & factory are mortgaged to the bank, sister concerns are good accounts, but casualty it will face due to one NPA account in the group company.

Therefore, timely action is critical to save the account from becoming an NPA account. That will start with knowing true and fair Balance Sheet and P & L Account. Financial statements are the results of entrepreneurs’ action so knowing the problems with the financial statements, going into the causes of the problems to address the same.

To a give simple example, know your net worth by subtracting dead stock and not receivable debtors / loans and advances. This is the reality.

Camouflaging to deceit lenders most of the times boomerangs.

Sunil Gandhi
Sunil Gandhi

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