In the realm of commercial banking, particularly in South Africa, a prevailing approach has been to primarily focus on the legal processes of debt recovery and balance sheet restructuring when businesses encounter financial distress.
However, there’s a growing recognition that this approach falls short of addressing the underlying issues faced by struggling businesses. In contrast, banks in the United Kingdom have embraced a more hands-on approach, actively participating in operational restructuring processes to help set businesses on a path towards sustainability and growth. Restructuring Bankers KPI’s are based on a proactive and regular face to face engagement strategy with businesses in distress that can only be achieved by empowering Bankers to make key decisions and creating a back office support structure that frees up the time they need to engage regularly with the Bank’s customers. This is the key to galvanising the change needed to turn the business around.
A successful business turnaround goes beyond financial adjustments and rearranging financial obligations. It involves fundamentally reshaping the way a business operates to ensure long-term viability. Unfortunately, many commercial banks in South Africa have not engaged deeply in this aspect of the turnaround process. Instead, they tend to predominantly focus on the collection and repayment of debt aimed simply at reducing the banks exposure. In so doing, they often overlook the need to undertake a detailed root cause analysis and therefore miss the opportunity to actively participate in efforts to revitalise the operational side of the businesses they finance.
To shed light on this issue, let’s delve into the contrasting approaches between banks in the UK and those in South Africa, and explore the potential benefits of a more proactive attitude towards operational restructuring.
Understanding the UK Approach
In the UK, commercial banks have adopted a proactive role in operational restructuring, recognising that sustainable recovery requires more than just financial manoeuvrers. Bankers in the UK directly engage with struggling businesses, regularly visiting clients, and actively participating in the operational, strategic, and financial restructuring processes.
This hands-on approach allows them to gain a deeper understanding of the challenges faced by the businesses and collaborate on solutions that go beyond mere debt reduction. In fact, this often requires the Bank to lend more money to fund the agreed operational turnaround strategy, a much easier task when you are involved in formulating and shaping the operational restructure.
By getting involved in operational restructuring, UK banks play a pivotal role in helping businesses navigate through turbulent times. They offer expertise, resources, and support, working closely with management teams and external panel advisors to formulate and implement strategic changes aimed at improving efficiency, enhancing competitiveness, and restoring profitability.
Approach in South Africa
In contrast, commercial banks in South Africa have traditionally taken a less involved approach to operational restructuring. While they may provide limited financial assistance, their involvement seldom extends beyond these financial measures into the operational domain of the business. Many banks prefer to remain at arm’s length from the day-to-day operations of struggling businesses, focusing primarily on legal processes and financial restructuring. This in isolation does not fully address the root causes of financial distress.
Not engaging in operational restructuring can hinder the long-term prospects of businesses in financial distress. Without addressing underlying operational inefficiencies and challenges, businesses may struggle to achieve sustained performance and growth even after restructuring their balance sheets.
While company owners, directors and management hold primary responsibility for strategic and operational matters, banks have a vested interest in ensuring the businesses they finance are viable and sustainable into the future. It is essential to consider how banks can protect their exposure and contribute to a comprehensive turnaround of a financially distressed business.
The Case for Change
The arms-length nature of commercial banks in South Africa in actively participating in operational restructuring could be attributed to factors and constraints such as risk aversion, regulatory considerations, a need for operational upskilling, lack of proactive and collaborative engagement with professional advisors / restructuring professionals, and a lack of awareness about the benefits of proactive involvement. The consequences of this approach can be significant, not only for the businesses involved but also for the broader economy.
By overlooking operational restructuring, banks miss out on opportunities to create value and foster long-term relationships with clients. Moreover, businesses that fail to undergo meaningful operational changes may find themselves trapped in a cycle of financial distress, ultimately leading to closures and job losses.
There is an opportunity for banks to embrace the benefits of incorporating operational restructuring as an integral part of the business turnaround initiatives and adopting a hands-on and proactive approach. By adopting a collaborative approach, banks can significantly improve their credit risk and stand a better chance of mitigating loss over the longer term.
Embracing a Proactive Future
It is time for a paradigm shift in the way commercial banks in South Africa approach operational restructuring. Instead of only focusing on debt collection and balance sheet restructuring, banks should take a more active role in addressing the underlying operational issues causing financial distress and guide businesses towards sustainable recovery. This proactive approach requires a willingness to engage deeply with clients, understand their unique challenges, and collaborate to implement holistic solutions that include change management.
Banks can leverage their expertise, resources, and networks to support businesses in implementing operational changes that position them for long-term success. In addition, by fostering collaboration with stakeholders such as turnaround advisors, restructuring professionals, regulatory bodies, academic institutions, industry associations – such as TMA-SA (Turnaround Management Association of South Africa) and SARIPA (South African Restructuring and Insolvency Practitioners Association), and business leaders who have successfully taken companies through turnaround initiatives, banks can tap into valuable expertise and resources, driving meaningful change in the industry
Conclusion
Operational restructuring is the most critical component of the recovery process for businesses facing financial distress. While banks in the UK have embraced a proactive approach to this aspect of restructuring, some commercial banks in South Africa have been more reserved. By taking a more active role in operational restructuring and adopting a more collaborative approach, South African banks can support businesses in overcoming immediate challenges, improving their risk profile, and contributing to the long-term stability and growth of the economy.