5.4 Monitoring the Restructuring Plan

Effective from Jan 06 2020 - Jun 30 2020
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SAMA expects banks to maintain effective controls in relation to restructured loans and in connection therewith, have laid out regulatory expectations regarding monitoring performance in accordance with the restructuring agreements once the new workout “regime” has been decided and implemented.

The monitoring function will need to address several aspects, the tracking of both how and when will the cash be generated is important.

The approval of the restructuring agreement is only a part of the resolution, whereas the bank must continue to monitor the borrower to ensure timely reprogramming of payments and meeting of commitments. If reasons exist on the part of the borrower to deviate from the agreement, that are reasonable and objectively justifiable, the bank may approve a waiver of commitment. In the event of material unjustified deviations, the bank must impose additional requirements, penalty interest, termination of agreement, blocking of the transaction account, execution, etc.

The control over the fulfillment of all commitments and timely payments must be ensured by the bank by setting up appropriate IT and Organizational support. If there is no confidence in the management, the bank should strive to involve an external consultant or authorized person to periodically monitor the company's operations on behalf of the bank.

For MSMEs, a short quarterly review may be the most cost-efficient manner, namely in the form of meetings with the key staff and inspecting the documentation, analyzing the financial statements in order to obtain an overview of a realistic business and financial situation of the borrower.

Tracking financial obligations and managing cash flow during the workout

Note: The below is not illustrated with a purpose of regulating borrowers, but rather as a guideline to banks to ensure that cash-flows management pertaining to restructured borrowers, is subject to adequate and proper oversight by the bank's staff, within the legal rights given by the restructuring agreement.
During a workout, managing cash becomes even more critical because the company as a borrower must concern itself not only with the overall manageability of its loan levels and timeliness of loan servicing payments but also with questions of fairness and equitable treatment among its various creditors and other payees as cash becomes available and decisions are taken as to how it is to be applied. Sales of assets, which during good times would have happened without issue, now must be subjected to additional scrutiny to ensure that they do not trigger alarms of “fraudulent conveyance.”
Careful cash flow forecasting should be accompanied by sound cash controls within the borrower company. This can be achieved either within the borrower's own systems or by introducing special organizational arrangements that effectively cordon off the cash management function.
When cash continues to be managed within the borrower company, the following is strongly advisable:
i.	Establish expenditure thresholds for different levels of review and control.
ii.	For expenditures over a certain threshold, ensure that double signatures are required to authorize payment.
iii.	Depending on the nature of the business, either centralize approvals and handling of expenditures or set regular budgetary guidance and spending “envelopes" for unit or department managers with appropriate procedures for enforcing spending/budgeting reconciliation and accountability.
iv.	Rationalize approvals and payments system.
v.	Use a third-party consultant or auditor or bank's internal independent resource to perform periodic operational audits as part of an ongoing monitoring process tailored to the key aspects of the workout and distinct from other audit and financial reporting functions.