You are a relationship manager in XYZA Bank and as part of periodic rotation of customers (credit portfolio) you are now in charge of Hypothetical Steel Fabricators Private Ltd. While studying this customer you observe the following:
? Dip in operating performance. The turnover and net profit grew 12% and 8% respectively, but excluding gain on revaluation of properties, there is a net loss due to higher interestn outgoings and a drop in operating profit margin.
? Cash flow remained stretched as the company embarked upon a huge inventory purchase (using bank lines) believing steel prices had hit the bottom. However the steel prices are yet to recover while the order book is not very healthy as the demand for steel fabricated products remains lukewarm.
? Balance sheet looks acceptable, however the gearing (gross interest bearing debt/ TNW) level is increasing and relatively high at 210% (or 2.10x).
? The auditors have been associated with the company for a long time (11 years) and had also acted as the financial advisors, which might entail a conflict of interest.
The key concerns identified are: constantly recurring liquidity issues, irregular and inconsistent financial information, below par financial management, lack of consolidated audited financial statements, absence of financial projections and poor corporate governance with owner/chairman making all the decisions without any real challenges from the management. This customer is already on the watch list and being reviewed on a semi-annual basis.
Please explain the possible risk mitigants you would seek from the customer and the kind of credit monitoring system you would implement to closely track developments.