Credit Crunch: Call for Caution

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Is there a credit crunch today in the market? On one side there are major policy reforms taken up by the government to encourage investments and business; on the other side, we hear about firms shutting down and people absconding. So, if the latter is to be believed, is the reason - credit crunch? Some may agree, some may completely negate any such sentiments prevailing; on the contrary, the majority would not dispute that there is a ‘slow-down’.

It is said that slow-down at work is an ideal time to revisit your mistakes, rethink the decisions taken and reset your work ethics. Though such cognitive thinking exercise is not easy in a stress situation when there is a problem with cash flows, no easy lending and delayed payments. But if you are in such a situation, then its definitely imperative to take time out and engage in the aforesaid reevaluation. As an old saying goes, if you continue to do the same things, in the same way – do not expect different results.

Careful Lending

Until the very recent time, we had a fairly lenient, oversupplied and weakly regulated credit market wherein banks provided ample credit assistance; to the extent that borrowers availed more facilities than genuinely needed.  This unwarranted behaviour and spending has not only put many in stressed situations but also resulted in the loss of trust and faith of banks in businessmen.  Renowned investor and business legend, Mr Warren Buffet has summed it up well saying - if you buy things you do not need, soon you will have to sell things you need.

The fact of the matter is that banks have become cautious about lending. There is adequate credit being facilitated by the banks but only to those who ought to be deserving borrowers. With the new credit scoring system by Al Etihad Credit Bureau, it has become easier to ascertain genuine borrowers. It’s a must that businessmen follow the new norm i.e. fiscal discipline in form of proper VAT filing and adhering to new regulations. Clear and regular communication with banks can easily reaffirm their faith in businesses.     

Lessons Learnt

If the lenders have become cautious, then naturally the businessmen should also become cautious in their dealing whether it's spending, investments or recovery. Business is all about taking a risk and being optimistic but wise businessmen will always be ambitious in their thinking and practical in their dealings. The key remains in proper preparation and planning; therefore when you engage in a new deal try to know the other party well, make sure that all the terms and conditions are properly written down especially payment terms and you follow it up judiciously. One way of looking at it is when banks are becoming choosy and cautious in deciding whom to lend then you should also do the same. Be very choosy and discreet when deciding about whom to do business with.

In my opinion, this is the right time for genuine businessmen and genuine business dealing. With the new regulation of VAT, where we are duty-bound to maintain proper books of accounts; it makes the businesses more transparent, helps to be more prudent and facilitates right decision making. Your books of accounts and audited reports reflect the financial health of your business, which can increase banker’s confidence about future prospects.

Whether it’s banks or businesses - all are looking for right people and organizations to engage with; here with ‘right’, I mean those who are financially prudent and disciplined. It’s the opposites who are feeling the credit crunch and probably the reason of the credit market’s slow-down. For people who are compliant and operating their businesses in the right way - there is enough credit available while others are being sidelined.

Therefore, the crux of the matter is to slow down and reassess ‘the way’ we are doing business and ‘with whom’ we are doing business. In this manner, temporary slow-down can be helpful for long-term growth and building the financial strength of the business to endure any market conditions or fluctuations. Dubai is all about opportunities and possibilities which enthuses and fuels our aspirations but one lesson the current scenario teaches us - is the significance of exercising restraint and caution for long-term prosperity.