Building a productive relatioship with banks a guide

In the Indian context, it is imperative for many businesses to approach banks for raising capital considering venture capital is still not available to all businesses. Thus for many a SME, bank financing is critical and this article tries to outline fundamentals for productive interaction with banks. 

Banks lend money against security as a rule. To develop a good banking relationship and arrangement, this must be understood and accepted. Many a time, borrowers wonder why securities are to be given in addition to the financed assets, normally referred to as primary security and fail to understand the concept of collateral security.  Collateral securities are self owned assets in business or personal assets which would function as security for the money advanced in the event of a failure of business or loss in the value of the primary securities. This is the reason why many times, banks refuse temporary facilities, adhoc limits etc since it is against their basic business principle. However, this rule would apply only at the start of the relationship and additional collateral securities would not be insisted every time enhancements are sought. In such situations, it is the relationship and the trust built by the borrower with his banker matters.

Relationship building:

It is the relationship, which a businessman develops with the banker that matters in the long run.  Businessman rarely appreciate that patience is the keyword in any relations building and banks are no exception. Of course, the banker in the present scenario still could afford to ignore his role in the relationship at times, which the businessman could ill afford to. Though this does not mean a defensive position in the relationship, this would be an appropriate cautious approach to a healthy relationship to gain advantage with an institution, which is bigger and stronger than any borrower.

To put it in simple terms, it is the borrower who has to position himself strategically in terms of his expression, presentation, conduct and appreciation of the assistance and support enjoyed by him with the banker. 

First of all, since this is a relationship requiring more trust and confidence, honesty and integrity takes prime position and it is the foundation for the relationship.  Though banks have sufficient money to lend, the risk assessment of the borrower is always where the limitation is. The assessment by the banker though based on certain accepted practices, norms, RBI regulations, internal management policies, are normally correct and if any deficiency is found in their assessment of a particular need of a borrower, it could always be explained and convinced. Here is where patience pays and plays an important role. Banks have always been pointed out as cause of business failures, though it may be true in very few cases. Though it is a very difficult understanding a banker and the banking arrangement, there are certain very basics points which are required to be followed by the borrowers for successful banking.

The various relationship building steps:

1.  Adhere in total to whatever is proposed at the time of sanction by the bankers.

2. Follow the sanction terms in its entirety with suitable modifications, if need be with justification.

3. Submit the required statements in time without being reminded.

4. Avoid taking bankers for granted.

5. Inform of all the developments in the business, good or bad frankly before they come to know from other sources.

6.  Be direct in dealings.

7. Treat the banker as major investor in your venture at a least pre-fixed expected return.

Distinct approach recommended for startups

Entrepreneurs who approach the banker for the first time expect the banker to understand the business as he understands.  Business models vary and for his bad luck there may be a borrower in a similar line of business that has failed the bank or the bank may have lost confidence in that type of business.  It would be advisable to have a dialogue with the banker beforehand to understand their comfort level and their viewpoints on the business and highlight theirs.  This would help in understanding how the other side views the business potential.  After all, banking is not a one-time affair and working capital limits are more or less permanent commitment of funds though renewed on a yearly basis.  A banker has all reasons to be negative in the first instance to commit these permanent funds to a stranger’s business.  It would be better if the views of the banker are appreciated and the entrepreneur represents his business suitable and convincing to the banker or take it to another with suitable modifications with the purpose to convince them.  This has worked successfully on many occasions. 

Of course, one may encounter a banker advising a customer to show the operations in the account for a certain period and this may make one wonder how to run the business without banking facilities.  The point that is missed here is the banker merely wants to know how much you are committing your funds, what are the modality of your operations, how much he can rely on your skills with your money…  All the money to start the business is not required at a time and this is one simple method adopted by the bankers to judge and start the relationship with a potential customer. 

The next step is to present the proposal for appraisal and sanction. Most of the times, the proposals are not prepared according to the bank’s requirements and sufficient time is lost in the sanction process. The powers of the sanctioning branches must be understood and it is better to approach a banker who has all the hierarchies within easily reachable distance. It would be better to engage a professional who has sufficient experience in banking arrangement, to guide in the presentation of the proposals to the bankers.

Further, provide all supporting data, third party evidences, financial statements and credit reports etc., in one go. Banks have a knack of asking information that is already available on record many a times and it is of no use to get upset till such time a relationship is started. Here again patience pays. 

After starting a relationship, follow the points mentioned to develop the relationship and grow in business. Thereafter, every renewal, enhancement is like a fresh proposal and would require the same steps and patience and by the time a second renewal is done, the borrower would enjoy a smooth and gainful relationship with his banker. After all, banks hold monopoly to money and it is one’s smartness that matters in utilizing this resource to one’s best advantage.

(The Author Murali is from DoMore Financials & Consulting (P) Ltd. which provides financial counseling and a helping hand for all financial needs. For feedback send mail to domore@businessgyan.com)

Issue BG15 June02