You are a customer relationship manager at Zakho Commercial Bank and as part of the periodic

rotation of customers $($credit portfolio$),$ you are now in charge of Silverton Iron and Steel Corporation.

While studying this customer you observe the following: $-$

$$ Dip in operating performance. The turnover and net profit grew $12\%$ and $8\%$ respectively, but

excluding gain on revaluation of properties, there is a net loss due to higher interest outgoings

and a drop in operating profit margin.

$$ Cash flow remained stretched as the company embarked upon a huge inventory purchase

$($using bank credit lines$)$ believing steel prices had hit the bottom. However, the steel prices

are yet to recover while the order book is not very healthy as the demand for steel fabricated

products remains lukewarm.

$$ The balance sheet looks acceptable; however, the gearing level is increasing and relatively

high at $210\%($or $2\mathrm{.}10$x$).$

$$ The auditors have been associated with the company for a long time $(11$ years$)$ and had also

acted as financial advisors, which might entail a conflict of interest.

The key concerns identified are constantly recurring liquidity issues, irregular and inconsistent

financial information, below$-$par financial management, lack of consolidated audited financial

statements, absence of financial projections, and poor corporate governance with the

owner$/$chairman making all the decisions without any real challenges from the management. This

customer is already on the watch list and being reviewed on a semi$-$annual basis.

You$$re required to do the following: $-$

a$)$ Explain the possible risk mitigants you would seek from the customer.

b$)$ Explain the kind of credit monitoring system you would implement to closely track

developments.