April 2010
Credit adjudication nonsense
by Bob Lefroy, Editor, Business Money
Lord Mandelson has impressed many with his grasp of business, something he displayed during his appointment as a European Commissioner.
His latest move, however, that of a credit adjudication panel to overturn declined loan proposals, betrays a fundamental misunderstanding of credit risk.
The EFG Scheme has stepped into the void where security shortfalls could be filled for an otherwise bankable deal but no amount of politics will turn something unsound in monetary, or economic, terms into a good proposition.
The CBI’s Richard Lambert has incurred the wrath of Mandelson by expressing very sound reasons why a credit adjudication panel can never be a realistic proposition and Lambert will not be the last to express reservations.
Many times in my banking career I have seen potential “yes” deals fall through the reservations of others involved in the credit chain. Never have I seen a “no” decision changed because if the banker responsible for the deal has no stomach for a proposition, there is no credible force in banking that will overrule him.
I have always related business credit to engineering. You are dealing in strengths, weaknesses, stresses and supports, flows of energy, interruptions to supply, power generation, wear and tear, obsolescence and renewal. Nowhere, but nowhere, in this interdependent construction of finite factors is there any opening for the objective element to be other than a very minor consideration. I do not believe in alchemy.
So if the credit systems of a bank, supported by a seasoned banker, have said they do not want to lend money to a proposition, and if the customer has tried other sources as they are entitled to do, and failed, then there is a zero probability that a credit adjudication panel can sensibly find anything to turn it into a deal.
Who will sit on these panels? Where is the business credit expertise? The old Labour habit of slinging together a committee of political celebrities would be no practical use to anyone and civil servants would be so out of their depths it would be painful.
I have been subjected to political pressure in lending decisions where some local worthy has a vested interest in jobs being saved, or created, or some social housing project finding funding.
These worthies have not a clue about credit: they display the same commercial and economic naivety that has landed the country in the massively indebted morass that is now our lot.
It might meet with the unreal protocols of some overarching authority, but it will be a pool of resentment and molten hate throughout its existence, to the benefit of any party and to the detriment of all.
You have only to see the latest ABFA numbers, that confirm the much lesser degree to which mature clients are drawing upon available facilities, to understand why the Royal Bank of Scotland and Lloyds Banking Group are not reaching their lending targets. The demand from credit-worthy businesses is just not there.
Whilst Gordon Brown prattles on about unemployment staying down he carefully omits to mention the hundreds of thousands who are on a four, or even three, day week. Unemployment should no longer be measured in bodies but in workable hours.
Were that so then unemployment in the UK right now would be uncomfortably high and all could see the reason why an economy, denied the power of five-day-a-week pay packets, is struggling.
And business is struggling too, hence the diminished appetite for business borrowing. The only way banks could meet targets would be to throw money away on propositions that will fail and create a new raft of bad loans.
Nobody sane would want that: but with an election at stake, sanity goes out of the window.
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