28/04/2023
Basic Challenges Faced by Collateral Managers in the executing CMA
The Collateral Warehousing Agent is often over rated considering the part it plays in a transaction between two very important and closely knitted Parties, in this case, The Bank and its Valued Customer(s).
The Bank goes out and spends time, resources and energy to create a transaction with its Customer and they jointly appoint the Collateral Warehousing Agent into the transaction as the Agent of the Bank, to provide specialist services in a transaction located, these days, mostly at the Customer’s address or in his facility.
The Agent is then given a Mandate by the Bank to monitor the transaction based on approved dynamics.
The Agent having set up a system that specialises in providing such service gladly accepts the appointment and an Agency is established.
So, the Warehousing Agent, is not an independent Company as many have attempted to describe it! The Collateral Manager is an Agent of the Bank appointed by the Bank to intervene in situations and/or issues that may occur during the lifetime of a transaction between the Bank and its valued Customer.
To ensure that the relationship between the Bank, its Agent and the Bank’s Customer does not impact unintentionally on the transaction, the Responsibilities, Limitations and Liabilities of each party in the Tripartite relationship are well laid out in a document usually called the Tripartite Collateral Management Agreement.
Implementation of the Tripartite Collateral Management Agreement:
The TCMA is a document constituted to regulate Credit Risks management strategy based on Hypothecation of Goods on Pledge from the beneficiary of a Financier’s facility to the Financier as security for the fund the Financier released as Loan to the Beneficiary Party.
It covers some key areas of the transaction necessary for ensuring over all success of Credit Risks Management Operation which dynamics are often rooted in a Strategy based on warehousing and controlling hypothecated (pledged) goods in a facility owned or rented by the beneficiary of the Loan and approved by the lending Bank.
Some of the key areas that we concentrate on in providing collateral management and control services to our Principals and Clients are:
A) Establishing the Initial or Financed Quantity of the goods procured, transported and delivered into the warehouse on pledge(collateral) for the amount of money the bank released to the Entrepreneur as loan.
😎 Depletion of the pledged goods or Collateral through a method that is based on depleting the verified stock/quantity under daily superintendence, monitoring and recording of the depleted quantity by the CMA or as authorised in written instruction or authorisation issued by Authorised Signatories /Representatives of the funding Bank for ex*****on to the Collateral Manager and reporting of Stock balance after each Release.
C) Superintending delivery of, and reporting, additional or top up stocks in transactions lasting long enough to warrant restocking
D) Reconciling the stock quantity received, released through Bank authorisation and reporting the resulting balance stock after the transaction cycle and receiving Clearance from the funding Bank to end the service or renew the tripartite Agreement for another transaction
D) It will not be complete without mentioning Consideration for the Collateral Manager for carrying out the Functions assigned to it in the Tripartite Agreement
CHALLENGES FACED BY THE WAREHOUSEMAN
1. Establishing the initial Stock Quantity when the Warehousing Agent was not involved at the time of procurement and receipt of the hypothecated Goods for stacking could present a challenge.
The Agent’s report on the goods met in the warehouse should provide reliable information for determining the effective or correct recovery unit price which Must(should) be paid to the bank before the Bank Authorises depletion of the Stock by its financed Customer. Putting up such report when the warehouseman did not monitor stock receipt and stacking presents a challenge particularly where the stacking of warehoused goods didn’t follow any known stacking pattern or the financed bank customer chooses not to provide supporting receipts or delivery documents required for verifying quantity of the goods delivered and stacked.
Where the transaction involves monitoring factory depletion and usage of financed raw materials, it becomes more challenging to execute Lien over manufactured goods when the Agent did not superintend issuing of financed Raw Materials to the factory for processing.
Recording, Monitoring and Accounting for pledged stock under the care or management of the Collateral Warehousing Agent should cover the various stages of a transaction particularly where the Collateral has to under go identity change or conversion through subjecting it to factory or production process.
Some times pledged goods are commingled with goods either free or already encumbered by the Entrepreneur in another transaction which neither the Bank nor its Agent is aware of. Pledged Goods need to be stacked separately from any other goods in the warehouse, labelled appropriately and monitored daily to the order, title and benefit of the funding Bank. But such is not always the case as some bank Customers deny the Agent permission or cooperation to place identification label on visible part(s) of pledged stock for ease of identification and public notification to ward off any attempt to multi-pledge the financed goods. Some refuse to dismantle built stacks to facilitate recounting and establish correct and reliable stock position to provide record useful in determining effective unit cost that would pay off a loan at the end of, or before, releasing the pledged stock in full.
Discriminatory stock depletion by some borrowing parties has occurred in some few cases over the years whereby the borrower got the lending bank to value all the stock as the same despite knowing that some are of higher value(s) than the others and proceeded to pay for release of the premium priced stock and abandon the not so valuable stock in the warehouse to unnecessarily extend the duration of the transaction and create impression that the transaction wasn’t as good as was expected.
To solve these challenges, we usually advise that the Warehousing Agent be involved from the beginning of discussions that might lead to collateral being warehoused for monitoring and control as means of repaying a loan.
Activities such as superintending, monitoring and recording supply/delivery of goods by parties down the supply chain to a bank approved warehouse, recording and reconciling supply invoices and payment receipts, monitoring factory processes and depletion of raw materials for production, monitoring or escorting goods in-transit from stored warehouse to port of shipment and getting copies of shipping documents as proof of shipment would go a great length in helping to reduce, if not prevent, over invoicing, funds or goods diversion and enhance trust between the lender and the borrower thus making more transactions successful and funds available for the later to borrow from the former at favourable terms and conditions.
2. Quality Monitoring is a very crucial part of the functions/ services provided by the Collateral Management and Control Agents. Storage environment and the Stock should be kept free of pests, insects and contaminants such as water and fungi, mould, etc. Sampling of pledged goods should be free of intervention designed to influence result as it is better to discover and address any issue that is likely to cause rejection of the Goods being packaged for export before it leaves Nigerian Port on export to another Country. Exporters can tell, the inconvenience and cost of retrieving rejected export.
3. On the Banks part, challenges do also evolve during the operating life of the Tripartite Collateral Management Agreement. Delay in transmitting release Authorisation to the Warehouseman puts a lot of pressure on the process, sometimes resulting in the borrowing party taking that as excuse to breach the pledged stock depletion process and indeed, the tripartite Agreement.
Many Bank Officials do not consider the Collateral Management Agent’s report as important part of their daily work hence they fail to open and read the Agent’s report even when it contains urgent and important information.
Also, we sometimes experience conflict between individual’s and Bank’s interests in executing our mandate particularly, when it comes to reporting and subsequently escalating reports on breach and/or failure to comply with approved procedure.
Risk Management is a process based on information and quick action on the information received to avoid precipitation of the observed potential risk. Bank Staff need to be trained on the processes, procedures and workings of the Collateral Warehousing Management and Control Strategy to ensure that they don’t become limiting Agents to the effective operation of the CMA.
Most times, lightening and/or thunder may precede rainfall and in my place, the Elders said that no cripple should be killed in a war that had its starting date announced in advance.
4. It’s expected in a tripartite warehousing Agreement that the Bank pays its warehousing Agent for performing its functions as agreed. I must say that only very few Nigerian banks are good examples when it comes to that. When your Agent is assured of payment periodically as at when due, the Agent would be motivated to be at its best. Such Agent would be able to issue Insurance policies required to protect the appointing bank against mistakes, omissions and commissions of it’s authorised representative(s).
Effective and frequent supervision by Warehousing Agents enable the activities of its workers to be monitored and intervention made in time to prevent unwarranted activities or compromise within its workforce.
5. As I end my presentation, I wish to specially thank the Board, Management and Staff of Providus Bank for organising the gathering that presented me with opportunity to develop this article and for standing behind Nigerian Entrepreneurs over the years. The challenges in Nigeria shall not limit their efforts and growth as they continue to encourage their Customers and other well meaning Nigerians to aim higher and grow bigger.
Engr. Godwin Amos Akpan MNSE, MMIN
MD/CEO
Vibrant Ventures Limited
