TOOL G5
An EWS is any factor which becomes a significant high-risk indication since the last credit assessment. This tool will help you identify the earliest warning signals (EWS) during client contact/review from a client’s business factors detailed in the credit proposal.
Country, MACRO, & Market (Industry)
Country Risk related
• New legislation/regulations
• Tax/ fiscal changes
• Political events or instability
Macro economy related
• Change in economic conditions(growth/recession, exchange rates, interest rates)
Market (Industry) related
• Legal action taken by or against the client
• Industry/client downgrades – Competitors/peers in problems
• Sector specific issues(e.g. oil prices for airlines, textile import restrictions)
Market (Industry) related (continued)
• Loss of a major client or contract
• Major downward shift in price of products
• Major upward shift in price of key inputs (raw materials, components, interest utilities) or availability problems
• Consumption changes in major markets
• Price war
• Significant increase in or change in nature of competition
• Changes in technology affecting either manufacturing or products and implications for substitute products.
• Changes in the nature of the business
• Loss of key product lines, franchises, distribution rights, supplysources
Company / Position
• Inefficient lay out of machinery/equipment
• Substantial single/repeat order that will strain production capacity/ working capital
• Poor maintenance of machinery/equipment
• Machinery/equipment is out of date and/or technologically redundant
• Insufficient production capacity or, conversely excess capacity – difficult to reconcile need for facilities with use
• Claims on warranties/guarantees/service agreements
• Product quality problems/problems at major suppliers
• Legal actions taken by or against client
• Loss of key personnel
• Major acquisition/divestment. Diversifying into new businesses
• Deferred replacement of outdated machinery/equipment
• Sales or sale and lease back of production equipment
• Increasing down time
• Low staff morale/labour disputes
Management
• Changes of senior management(especially if unexpected)
• Lack of strategic plan/understandable corporate mission
• Frequent strategy changes
• One man show
• Lack of succession
• Unexplained, unexpected, frequent or questionable changes in management
• Poor corporate governance: chairman and chief executive positions combined, quality and independence of board members
• A significant portion of management’s compensation represented by bonuses, stock options, or other incentives
• Committing to achieve unduly aggressive or clearly unrealistic forecasts
• Lifestyle
• Complex corporate structure
• Arrogant behaviour towards funders, creditors, media
• Unwillingness to provide information
• Lack of openness/honesty
• “Trophies”–new head offices, expensive sponsorships, ownership of sports teams etc.
• Poor labour relations
• Lack of experience mix
• Negative press/media reports
• Rumours/Reputation
• Collapse/rapid change in share price
• Negative MIS information ignored
Finance / ACC-Related
• Reliability of data and creative accounting. See relevant Tools.
• Unexplained or unusual decreasing cash balances.
• Evidence of lengthening credit terms to clients
• Increasing inability to collect receivables
• Discounts given are larger, more frequent
• Speculative inventory purchases
• Evidence of stale inventory, large inventory levels or wrong mix of inventory
• Suppliers demanding quicker payment or cash before delivery
• Suppliers demanding letters of credit/guarantees
The earliest warning signals are usually non-financial in nature!
