SME Renewal with Stale Stock and Thin Collateral Cover
An SME sports-goods manufacturer in Sialkot has a running-finance limit of PKR 85 million that expired 15 days ago; outstanding is PKR 82 million. The stock statement is five months old, and receivables ageing shows 38% over 120 days. Last audited accounts show EBITDA of PKR 24 million, current portion of long-term debt PKR 16 million, and markup on total debt PKR 4 million. The factory is valued at PKR 140 million, with a forced-sale value of PKR 95 million. The borrower wants renewal plus an additional PKR 20 million for an export order from a new buyer; total exposure would be PKR 105 million against the same collateral. The relationship manager says the order is confirmed by email and proposes accepting a revised stock statement prepared by the borrower's accountant and dated last month. No instalment is overdue, but the limit is expired.
1. Calculate and interpret DSCR and collateral coverage, and state whether you would recommend renewal or renewal plus enhancement.
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DSCR = EBITDA / (current portion of long-term debt + markup) = 24 / (16 + 4) = 1.20x. That is adequate but not comfortable, and it relies on EBITDA that has not been tested against the stale stock and weak receivables.
Collateral cover for the existing exposure = 95 / 85 = 1.12x on forced-sale value. For the requested exposure = 95 / 105 = 0.90x, below the existing cover and weak for an enhancement. The new buyer is unverified, the stock statement is five months old, and 38% of receivables are over 120 days.
I would not recommend renewal plus a clean PKR 20 million enhancement. I would recommend renewal at a reduced or unchanged limit with conditions, and consider a separate export-finance facility secured by assignment of export proceeds and, if possible, additional collateral or credit insurance.
2. What conditions and documents would you require before any disbursement?
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Before disbursement I would require: a current stock and receivables statement verified by an independent stock audit; updated audited or management accounts; twelve months of bank statements; the export contract or irrevocable LC from the new buyer; and assignment of export proceeds to the bank. Collateral should be revalued and the charge re-registered if necessary.
Covenants should include a minimum DSCR of 1.25x, no dividends or related-party payments without consent, monthly stock and receivables reporting, and a reduction schedule for the excess receivables. Personal guarantees and cross-default clauses should be considered. The limit should be structured so that the additional exposure is self-liquidating from the export order, not a permanent increase in working capital.
3. How should you respond to the proposal to accept the borrower-prepared stock statement dated last month?
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I would reject the proposal. Accepting a borrower-prepared statement with a backdated or convenient date undermines the credit decision and creates misrepresentation risk. The statement must be current, signed by an authorised borrower representative, and preferably verified by the bank's stock auditor or an independent firm.
If the relationship manager persists, I would escalate the matter to the credit head and compliance. The issue is not only documentation quality; it is whether the bank is being asked to rely on information that may not reflect the borrower's actual position.