Restructuring a Spice-Processing SME After a Lost Season
Himalayan Spice Processors Pvt. Ltd. runs a turmeric and chilli drying unit in Bardiya. It holds a term loan of NPR 25 million (60 monthly instalments, 13 remaining, outstanding NPR 19.4 million) and a working capital facility of NPR 10 million. Security is 8 ropani of institutional land valued at NPR 18 million; the bank applies a 30% haircut, leaving NPR 12.6 million of cover - below the term loan balance. The promoter's personal guarantee is NPR 5 million.
An erratic monsoon cut raw material throughput by 41% and the largest buyer delayed payments by 90 days. Latest audited figures: EBITDA NPR 3.1 million, interest NPR 1.9 million, scheduled principal NPR 3.6 million - a DSCR of 0.56. The account is 62 days past due.
Management has asked for an 18-month principal moratorium, tenor extension to 9 years, and a further NPR 3 million working capital line to buy stock before the next harvest. The promoter offers an additional mortgage over his residence, valued at NPR 7 million.
1. Assess whether this is a viable restructuring or a deferral of loss. Show the arithmetic and state the conditions you would attach to any sanction.
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Step 1 - Test viability, not willingness. Build the post-restructure cash flow. On NPR 28.0 million at 11%, interest is about NPR 3.08 million a year. With an 18-month principal moratorium, debt service falls to interest only, so DSCR moves from 0.56 to roughly 3.1 / 3.08 ≈ 1.0. That is break-even, and it assumes the buyer actually pays.
The NPR 3 million line is the real driver: without stock there is no restored throughput. It is defensible only if disbursed against hypothecated stock and a confirmed buyer order, not as a cash top-up.
Step 2 - Conditions. (a) Assignment of the buyer's receivables into an escrow at this branch; (b) hypothecation of current assets with monthly stock statements; (c) completion of the residence mortgage before any disbursement, with the guarantee continuing; (d) promoter equity injection of at least NPR 2 million; (e) covenants: EBITDA above NPR 3.0 million and buyer payment cycle under 60 days; (f) quarterly review with a site visit.
Step 3 - Stress test. If EBITDA falls 15% to NPR 2.64 million, DSCR drops to 0.86 and the proposal fails. The structure therefore needs a buffer: a step-up in pricing or a defined trigger that converts the moratorium into interest-plus-principal.
If the promoter refuses the equity and the mortgage, treat the request as loss deferral and move to recovery. The signal is not the schedule he asks for; it is what he is willing to put at risk.
2. What asset classification and provisioning position should the branch take at the next reporting date, and what must you tell the credit committee about evergreening?
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Classification. At 62 days past due the account cannot stay in the pass category. Under NRB's asset classification framework a loan overdue beyond 30 days moves to substandard, and provisioning is computed on the outstanding after eligible security is deducted (confirm the current percentages in the Unified Directives - 25% is the usual substandard rate). The new NPR 7 million residence mortgage is not yet perfected, so it cannot be used to flatter the position, and unpaid overdue interest must not be credited to income.
The evergreening test. Restructuring changes the repayment schedule; it does not change the borrower's capacity. The only question is whether the restructured DSCR services the restructured debt - here, marginally. Flag two things to the committee in writing: (i) the NPR 3 million line, if drawn and used to pay instalments, is evergreening by another name; ring-fence its use to stock purchase against invoices; (ii) any waiver or capitalisation of overdue interest would disguise the position and must be separately approved and disclosed.
Present three options with numbers. (1) Restructure with the conditions, booking substandard classification and provision on day one. (2) Restructure and sell down part of the exposure. (3) Recall and enforce, with realistic recovery and time-to-cash on the land.
Upgrade discipline. Return the account to standard only after the borrower has serviced the restructured schedule for the period the directive requires. One prompt instalment is not evidence. Record the full rationale in the credit file, because a restructuring file is examined line by line.