How to Handle Problem Loans: A Guide for Bankers by T. H. Donaldson

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By T. H. Donaldson

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This requires management to diagnose the nature of the change. The financial structure the company needs to survive, and the management ability to use it to best advantage, are different from a purely cyclical downturn. Bankers must not let a cyclical downturn conceal the existence of a structural change. A banker who is expecting cyclical decline may miss the signs of a structural weakness exposed by the cycle. LOSS OF MARKET SHARE Loss of market share during a cyclical decline may provide the first warning of deeper trouble.

The industry may only be able to increase its price by losing volume; the choice between lower margins and lower volume will depend on the nature Recognising the Warning Signs 33 of the industry and of the market, but high capital intensity can make loss of volume crippling. Or the price of competing materials may remain stable, so that, say, copper products are replaced by aluminium or plastics. Here, too a probably permanent increase is more worrying than a temporary one. Costs may also increase for reasons which affect only one company, such as a failure to control wage rates or productivity; or distance from raw materials when transport costs rise sharply; or a company competing in international markets from an unfavourable currency base.

Faulty marketing tactics or a slower build-up in market share of the new product than the company had expected. Then the company will only need time, or a minor change. and even a weakish balance sheet should survive. The company may budget costs wrongly. rather than revenues. An increase in raw material prices should affect its competitors in the same way. If the particular product is price-sensitive. the industry may only be able to increase its price by losing volume; the choice between lower margins and lower volume will depend on the nature Recognising the Warning Signs 33 of the industry and of the market, but high capital intensity can make loss of volume crippling.

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