“A banker is he who happily offers you an umbrella but wants it back immediately it starts to rain” - My lecturer as a Banking Student in London
This is a true story. The facts in brief that follow are documented and unbiased. Only names have been invented for obvious reasons of preserving confidentiality.
A decade ago the directors/shareholders of Widget Ltd. never imagined that their old-established manufacturing business would fall casualty to the government’s import liberalisation policy as a pre-requisite to joining the European Union. Year after year they had experienced steady growth in a very competitive local market for widgets and had ploughed most of their after-tax profits into financing the company’s industrial premises. A wise decision, indeed. Bank borrowings were solely for working capital purposes, mainly to finance stocks of raw materials.
Furthermore, from their personal savings they had managed not only to own their residences but also bought undeveloped land contiguous to their company’s property in case they needed to expand operations. But luck dictated otherwise. The removal of protection on locally-manufactured widgets soon started to tell on their turnover and profits. Demand contracted, sales dropped considerably, profits increasingly turned into losses.
Their only hope to survive was a transformation from manufacturing to importing widgets. Inter alia, this entailed disposing of machinery and raw materials, and financing stocks of imported finished goods. Their competitors in the widget industry were doing exactly this and, apparently, without any skirmishes with their bankers.
Not so Widgets Ltd. R Bank plc maintained that the company had now become ‘high risk’ and immediately slapped a 9.5% interest charge on the total of the indebtedness to date, not just on the additional. All this occurred when other manufacturers, including competitors, were paying no more than 6.5% with other banks.
At that point in time the total indebtedness was under Lm400,000. The yearly interest charge suddenly soared to around Lm38,000. An inexorable repayment programme was negotiated which not only impeded the desired changeover from manufacturing to importing, but compelled the directors to hasten selling the hypothecated immovable property which, incidentally, the bank’s architect had valued at almost Lm800,000. On top of this security, the bank insisted to add the privately-owned land nearby, as well as the directors’ personal residences, strengthened by joint and several personal guarantees on all their assets. In all, the security cover approached Lm1.2 million besides, of course, the usual general hypothecs on the company’s other assets.
Threats of calling-in the overdraft and foreclosure left Widget’s directors no option but to accept everything demanded by R Bank plc, even incurring unnecessary expenses like another valuation by the same architect on the same property less than three years after. As if in Malta the value would go down!
Interested developers were not wanting in numbers and alacrity. Negotiations, however, faltered when the directors’ predicament became inevitably known to the developers whose offers plunged below credibility. There was only one way to proceed: a joint-venture deal with a genuine developer not after ‘a fast buck’. The bank accepted this as being in everyone’s interest, still maintaining that it was ‘an act of forbearance’ on its part. The surcharged interest rate continued piling up the indebtedness such that it swelled to over Lm 650,000.
Eventually a joint-venture deal was agreed which, however, entailed an outright sale of around half the immovable property, with the remaining balance providing the basis of the real joint-venture. The architect’s valuation proved to be correct. The proceeds from the sale managed to reduce the total indebtedness to around Lm400,000 and the interest rate down to 7.5% ( lately up again to 7.75% ).
Year after year R Bank plc also imposed a ‘facilities renewal’ fee for practically copying out the previous year’s sanction letter. This year, moreover, in addition to the renewal fee, R Bank plc super-imposed a ‘rescheduling fee’ of Lm1,857. The directors, naturally, protested but, as usual, had to succumb, or else!
I quote from the bank’s explanatory reply letter. “Rather than proceeding to realise its security and obtain repayment from proceeds of judicial sale, the Bank has shown forbearance…”.
And, “the servicing of facilities that are rescheduled requires a level of maintenance higher than the norm - hence the application of a rescheduling fee”. Of Lm1,857 and on top of the yearly renewal fee?
Conclusion: Is Malta being served or exploited by the banks? Any other similar experiences from readers? It would be interesting to hear the views of the MFSA or the Malta Bankers’ Association.