 Bismillah Khman Reem and As-Salaam-Alaikum Pakistan. Welcome back to the module on corporate governance and today we are going to be talking about something very important and that is creditors and corporate governance. So, again any business which is taking place requires creditors because definitely the equity or the amount which any investor has or any organization has that is always limited. But the creditors which are the different financial institutions they have immense and vast sums of money with them because of their depositors and therefore they have to invest somewhere. But however when we are talking about corporate governance it is also very essential that these creditors have their amounts safeguarded and also their interest safeguarded because they are giving huge amounts to the organization and they would expect a certain return on it and therefore the role of the creditor and corporate governance is hand in glove together and is a very very important aspect of corporate governance. Now ladies and gentlemen when we talk about the critical nexus between banks and firms not only for financing but also for efficiency and ultimate survival it has never been under emphasized. So, again we do not only talk about financing but we are also talking about making the systems more efficient whereby the organizations can generate more profits and it would enable them to pay back with profit to the finances to the creditors and secondly also that it has to be sustainable and survive whereby the creditors in the long term can recover the amounts which have been given to them. Banks and other creditors have an extremely important role to play in fostering efficiency in the medium and large private or state owned organizations. So again especially in the context of large and medium size enterprises the role of the creditor and of the different financial institutions is very important and why so because if proper processes and systems are not being practiced if they are not if they are the SOPs the standard operating procedures are not manualized in the right way then they would always be a very high possibility whereby the organization can default on a loan or can even go towards bankruptcy and therefore the creditors have a very very important concern and a very important stake within the organization and therefore practicing corporate governance in its true essence becomes critical for organizations to survive and to move forward in a better way. When we look at the creditors then creditors in turn rely for the survival on debt repayment by their borrowers and strong creditors are as critical to the efficient functioning of enterprises as our strong owners. So again on one side we see that the investment which has come in has come in from the investors from the shareholders and on the other end what we see are the creditors now. What we see I mean when we had the Brazil debacle we see how Brazil as a nation also defaulted on international obligations and their banks collapsed due to a collapse in the land sector whereby the property drastically fell and thereby many large organizations could not fulfill their obligations to the creditors and to the financiers. We also see in Asia we see the meltdown which took place in the early 2000s and then again we see how the financial markets also collapsed and all of this is affecting the financial institutions which in turn affect the whole economy. So therefore it is critically important that efficient functioning of enterprises happens with strong owners and strong financiers and creditors. Now this requires adequate information lenders need information on the creditworthiness inadequate financial and cost accounting can hide the true value of the firms asset. So what we see is that in the context of transparency there is window dressing or there is deficient accounting systems both are detrimental to the organization. The organization has to ensure that there is no window dressing that there is no dual accounting that everything is overboard and remains within the ambit of law and accounting principles and most importantly they have to ensure that everything is evaluated in the right way and all the systems and all the frameworks of accounting are followed in absolute terms and there should be no deviation from that and then again a very important thing is is that they cannot hide their assets also so there has to be a complete disclosure by the organizations so that it can facilitate the creditors the financiers and also the primary stakeholder which is the shareholder. Dramatic changes in the structure of input prices demand competition distribution channels reduce the value of prior information when information asymmetries are significant adverse selection may make it costly. So again we have to harmonize we have to systemize and we have to ensure that all accounting and financial protocols are followed by the organization and they must be done dot to dot and they must be done precisely 100 percent so that there is no ambiguity and secondly all of the stakeholders can get a fair picture of what is happening within the organization and especially the creditors they must be aware because they would have given large sums of money which are which are actually relative but large sums of money to that particular organization and therefore it is justified that they should have correct and truthful information regarding the different issues of finance and accounting. When we talk about creditor investing then the existence of appropriate market based incentives for creditors be the banks creditors or the government these incentives may be in the form of higher margin of profit higher interest charges from customers and sometimes even reduction in quantum of non-performing assets. So this is very very important that we should be able to understand that when a creditor is pouring in money then they are concerned with these different aspects of finance and accounting and again how is it that they are going to be motivated or they are going to be incentivized to further invest in the organization is through high profit margins is a high interest charges from customers and also the fact that organizations reduce the non-performing assets because they are not active in generating revenue and it is better that they can be sidelined or they can also be disposed of to create a better picture financial picture of that particular organization. The high growth achieved after consolidating the current business in an intensely competitive environment may by itself act as an incentive. So very clearly stipulated and also mentioned earlier that if we have a high growth rate if the organization is expanding then definitely it is a huge incentive for creditors to join in and they would be willing to provide funds for further expansion and further growth. So it is basically a win-win situation which is created and hand in glove whereby the creditors and the organization can grow better together and that is an extremely important aspect. We also talk about in this chapter debt collection without an effective system of debt collection debtors lose repayment discipline in informal credit markets the effectiveness of debt collection depends on the non-legal or the extra legal sanctions. So again whatever frameworks that are available whatever laws that are available they are extremely important in the context of data collection it is very important that the organization itself has a proper data collection department which can engage with the different organizations and ensure that they receive timely payments and also identify areas of weakness which can be supplemented by that particular organization. Now when we are talking about informal credit markets then debt collection depends upon the non-legal or the extra legal sanctions and that basically means that in the informal market system it becomes a little bit difficult to legally regulate because they have their own systems like in Faslabad they have the Parchi system in which that Parchi is going from one person to the other person but that is more reliable and more trusty than even a bank pay order because that trust has been established over decades and they have their own accounting mechanism which is informal but is also very effective and that is something very important to comprehend and to understand that how these informal markets actually are able to be more trusted and more relied upon than the formal banking and therefore there is a great need for the banking industry and for the banking sector to come up and meet the needs of different organizations so that they can pulverize more money into those organizations and in return get higher returns and also a guarantee and implied guarantee that those amounts are going to be returned. Now when we talk about credit monitoring then formal credit markets depend more on legal procedures involving collateral, work outs, credit management, reorganization of the debtor firm and bankruptcy so when we talk about credit monitoring then we are talking about collateral, work outs, credit of mandated reorganization of the debtor firm and bankruptcy so all of these are the very important elements related to corporate monitoring and the organization should be monitoring all of these proxies so that it does not go into a rollover. Debt diffusion is another very important topic and debt purchases provide finance in the return for a more promised stream of payments if the corporation violates these governance or defaults on the payments then debt holders typically obtain the right to repossess the collateral so what we see over here is that it becomes very important that the debt purchases are regulating and streamlining the different payments and most importantly that if the governance or the agreement is violated or there is a default of payments then the debt holders typically should be able to repossess that particular collateral but if they cannot repossess that particular collateral then that would mean that they have a very loose control and the debtor would not be willing to give back the money to the creditor so it's a very fine line and again a lot of dependency upon trust and creditworthiness is extremely important so that is why all of those things are assessed in a better way both in the context of different frameworks and also scientifically now. Now corporations are thrown into bankruptcy proceedings so if they are not properly regulated then a corporation or organization can also file for bankruptcy creditors do not need to coordinate to take action against a delinquent firm so it's not necessary that a consortium is formed it's not necessary that an association is formed one individual creditor can also move and also legally fight for their rights clearly the effective acquisition of corporate control with diffuse debt depends upon the efficiency of the legal and the bankable system so again what we have to see is that is the legal system that astute at right and receptive to all of these claims or will they favor the the debtor or will they favor the creditor and secondly what we see is that there has to be an efficient legal system and a bankruptcy system so that all the legal creditors can be given their amounts on a pro-rata basis and also on the basis of first or second or third right so all of these things are very important that they should be drafted in the right way they should be assimilated in the right way and then they should be registered also on the right platforms and forums so that there is no ambiguity at the end of the day a bank's corporate governance power derives from the following it's legal rights in case the firm's default or violate companies a short maturity of its loans so that corporations must return regularly it's frequent due role as the voter of substantial equity shares so again many a times it is seen that the major creditors also gets a position in the board and therefore then has direct influence at a strategic level with the cooperation so this is extremely important and we have to see that all of these systems and processes are formulated in the right way concentrated debt holders can also renegotiate the terms of the loan which may avoid inefficient bankruptcy so this is extremely important that sometimes there are too many bankruptcies taking place and then it creates a domino effect or it creates a ripple effect whereby it affects the whole economy and the whole sector also and that should be avoided at all costs because otherwise the system can collapse so it's important to understand that in various cases renegotiation can also take place which would avoid inefficient bankruptcies and that is a very important aspect of this whole system and this whole framework nevertheless large creditors face important constraints to exerting sound corporate governance in many countries so and that has been stated earlier that corporate governance being practiced in its two essence is very limited and therefore there is a great need to ensure that such an environment is created such opportunities are created such resources are made available whereby bankruptcies do not take place in that that is extremely tricky context and we have to ensure that the whole system is calibrated in such a way that it tends to facilitate the creditors and the debtor does not take undue advantage by creating ambiguity or by denying certain facts so this is very important and then to ensure that even if an organization has to go bankrupt that also must be done according to a particular system a particular stepwise approach and also the fact that no directors no debtors or no creditors fundamental rights or their amount which they have to extricate from that particular organization should be compromised in any way thank you so much