A few days ago, I chatted with the owner of a popular Indian banana leaf eatery.
There was the usual lunch time crowd, all the tables were full and a line was forming outside waiting for tables to be cleared.
I was surprised to be told that his business has only recovered to 70% of pre-Covid sales. The main reason was due to physical distancing, which resulted in his restaurant seating capacity being reduced by 30%.
Many companies in the last three months have to conduct heavy promotions, giving big discounts to clear inventory and to improve cashflow. Profit margins are reduced but the cash inflow helps to pay the rent and staff costs. Not all companies have recovered to this level. These are the better performing companies.
Some companies are not so lucky, their industry decimated by the virus-induced drastic dropped in demand or health regulators preventing them from conducting their regular business.
When will recovery start for these companies? Even if vaccines are found, it will take another 12 to 24 months of having to live with the coronavirus. With the recent spike of Covid cases in populated countries like India, Indonesia and the European continent, this pandemic will get worse through winter which means we will not see any real sign of economic recovery till the spring of 2021.
Except for a few industries, the year 2020 will be remembered as a disastrous year for all concerned. If your 2020 revenue exceeds 70% of 2019 numbers then you would have done tremendously well. You are on survival mode if your 2020 sales have dropped by half compared with 2019. If 2020 is less than half of 2019, your company will be in need of critical care, cash starved and malnourished.
Malaysian companies and individuals, to a certain extent, have been saved by the brilliant implementation of the six month moratorium on loans. Starting from April and ending in September, borrowers found themselves not having to worry about loan repayments of any kind. From the total of RM80bil, individuals could rollover RM60bil loans for another six months whilst companies rollover RM20bil loans.
Some individuals treated the non-payment of monthly installments as excess cash for investment into stock markets, others cut their spending and saved the money. Some people lost their jobs and many people had their salaries reduced. Most people have ongoing housing mortgages and car monthly payments to service. The honeymoon of non payment is over.
As the moratorium ends on Sept 30, Bank Negara and our commercial banks have announced to the public that help is available to all those affected by this recession. The six months non-payment – principal plus interest (P+I) can be be restructured by adding on additional repayment months to the existing loans. But you have to resume your normal monthly payment starting Oct 1 2020. With the onset of recession, our country do not need a banking crisis with high NPL across the board. In a way, Bank Negara has taken a prudent approach to allow our banking system to flatten the NPL curve. Since most companies and individuals face a short-term cashflow problem, the restructuring of loans will allow many good companies and credit worthy individuals to recover from the recession.
Due to the uncertainty of the economic recovery, all individuals are advised to take up this once-in-a-lifetime offer from the banks. For those who have lost their jobs or in danger of losing your jobs or have suffered permanent pay cuts, you are advised to restructure your loan to a smaller monthly repayment by increasing the loan tenure (eg from 20 years to 30 years housing loan) or the banks allowing you to pay interests only for next 12 months, or smaller monthly payments for next 12 to 24 months with bigger monthly payments in the later years.
Different banks offer different solutions but the general consensus is all banks want to help you to get through this unprecedented pandemic recession.
“Deserving cases will get maximum assistance, ” that is the message from my discussions with senior bank officials. If the banks can reduce the interest rates (especially the BLR plus loans), the debtors burden will be further reduced. One can only argue the BLR rates set by the banks are not in sync with the current low interest and lower effective cost of funds that the banks enjoy.
Treatment of SME’s and corporate loans will differ depending on the types of business and types of loans but the principle treatments are the same. Prolong loan tenure, pay interests only, reduce monthly repayments and conversion of short term trade bills (P+I) into a 12-month term loan.
The type of loan restructuring for SMEs will depend greatly on your next 12 months projected cashflow. Banks will require a cashflow statement detailing your projected sales, operational expenses, installment payments, interest expense etc basically projected cash inflow minus your cash outflow.
Even though financial year 2020 is a washout year, it is still prudent to present a 2020 9+3 cashflow statement to your bankers together with the 2021 full year forecast.
I understand that forecasting for 2021 will be difficult due to the economic uncertainty of the pandemic (potential lockdowns and change of regulations/MCO etc), but you will find this exercise to be very useful to your company in terms of evaluation on viability of business, cashflow sustainability and the desired operational expenses that you will need to adhere to.
If you have the time, do two separate statements and projections, worst scenario and best scenario. Be realistic and prudent with your projection. Help your bankers by helping yourself first. Just remember your bank loan officers have a few hundred cases to manage. So prepare your projected cashflow statements before you meet the bankers. It will speed up the processing time for final approval from the loan committee.
For SMEs that have multiple loans from multiple banks, just be forewarned that you will get different treatments from each bank.
So a detailed cashflow projection will help to show the multiple banks the kind of assistance you would need to survive the next 12 months.
With the help of friends who have offered their pro bono services, Clifford Clements (ex-banker), Sang Hoe, Ryan Sim and Boon Hooi (Ernst & Young), we have produced business cashflow templates that can be downloaded from the QR code or email email@example.com.
Three different templates are available for use by SMEs – manufacturing, trading and services. We hope SMEs will find the templates useful. If you still need help, I would suggest you approach your auditors for assistance to fill up the cashflow statement. We also hope the bankers will evaluate genuine applications with empathy and compassion, offering their kind assistance to deserving SMEs.
It will be a slow recovery but we are all in this together. Maju Bersama!
Tan Thiam Hock is an entrepreneur. The views expressed here are his own.