Bank turnaround strategies for financially distressed small businesses in South Africa
Date
2011-04-13
Authors
Gumbo, Melusi
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Abstract
Small and Medium Enterprise (SME) firms in South Africa are usually constrained from competing effectively by the unavailability of financial resources. The situation worsens when the SME is in financial distress and has to depend on a bank to help it turn around. Banks on the other hand suffer losses as a result of bad debts if they do not proactively and effectively manage distressed SMEs.
This research, through structured interviews with bank work-out specialists, explores the turnaround strategies that banks use to rescue SMEs.
The findings reveal strategies commonly used by banks as: 1) providing moratorium or deferment of payments; 2) taking legal action; 3) debt reduction; 4) seeking additional collateral; and 5) giving the SME time to find other bankers. Such strategies are influenced by a variety of non firm specific variables, notably the SME’s history and cooperation with the bank as well as the availability of additional security for loans.
The research concludes that banks adopt short-term, risk mitigating and recovery strategies for financially distressed SMEs, with the objective of first protecting their funds at risk, only after which they consider long-term turnaround strategies.
Description
MBA - WBS
Keywords
Turnaround strategies, Distressed companies, Small businesses