THE selection processes for companies set to benefit under the distressed fund should be moved from banks to an agency as the struggling firms fail the creditworthiness test used by financial institutions, a new report has shown.
Companies have been failing to get funding under the Distressed Industries and Marginalised Areas Fund (Dimaf) — a $40 million kitty to rescue companies — due to the stringent requirements needed by the dispensing bank CABS.
Dimaf was formed in 2010 to help companies retool.
Government and Old Mutual were supposed to inject $20 million each. To date, Old Mutual has put in $27 million while government has failed to honour its obligation.
In a report, Access to Bank Credit as a Strategy to Re-Industrialisation in Zimbabwe: The Issues, the Zimbabwe Economic Policy Research Unit (Zeparu) said given the banks’ model, it was difficult for them to be used as an avenue for distressed companies to access funding.
Zeparu said companies are more likely to fail the creditworthiness template applied by banks, recommending that the disbursement mechanisms for schemes for distressed companies be moved from the banking institutions.
“Thus although Dimaf is well intended, it is difficult for distressed firms to access loans when they are lent through banks as they would always find it difficult to lend to distressed firms.
“The government thus could either lend directly through other platforms besides banks or outline separate access requirements for its own share in Dimaf if distressed firms are to access credit,” Zeparu said.
“Alternatively, the mandate to disburse funding to distressed firms can remain with the banks but the selection process for beneficiaries would be moved to an agency that exclusively deals with distressed firms to be able to come up with a template that is able to recognise those distressed firms with the potential to come out of their situation.”
Zeparu said the switch to another agency other than banks would help increase access to the funds, even though risk monitoring and elimination mechanisms would still be in place.
Companies have been struggling to get long-term loans for retooling as banks are offering loans with short tenures due to the short-term nature of deposits.
Zeparu said although the liquidity position has continued to improve since dollarisation, firms are obtaining lines of credit from banks at very high costs and on very short terms which was not in line with manufacturing cycles.
The short-term credit does not allow the companies to earn a return before it is due, it said.
Zeparu said there was generally a huge demand for credit, which exceeds the capacity of banks to fulfil.
“In addition most of the distressed firms are already highly indebted, with creditors already expecting to be paid. Thus the bank giving out new credit to such a firm would want some assurance that it would be prioritised in payment, which might not happen as other creditors are also owed,” Zeparu said.
“Thus banks would only give out loans to distressed firms if such firms have a clear turnaround strategy which is deemed feasible to eliminate risk. Firms have been experiencing difficulties in demonstrating that they have a clear turnaround strategy.”
Zeparu said while government credit guarantees can be an important source of risk elimination, “government is known in the market to be fiscally constrained, such that banks would be hesitant to accept a government guarantee as some form of collateral or risk cover”.
In July, Industry and Commerce minister Mike Bimha said 48 companies had accessed Dimaf. Of those, 26 were from Bulawayo with the remainder from other provinces.
Bimha said the conditions were too stringent for ailing companies to be able to access the fund, adding that government had engaged Old Mutual and Cabs to relax the terms and conditions.
“The terms were even tough for an ailing company. They wanted audited accounts for the past five years and collateral. These are ailing companies and how do you prove that you are going to pay when you are already dead?” Bimha said.