Crisis at GFG Alliance and insolvency of Greensill Capital is yet another example of businesses failing to mitigate risks inherent in lending

The crisis unfolding at GFG Alliance and the insolvency against Greensill Capital prove two major points - "never put all of your eggs in one basket" and "always plan and mitigate the risks inherent in the nature of businesses you are in before it is too late".

A higher proportion of lending at Greenhill Capital was of invoice based nature. Lending by nature is a risky business for which the lender charges interest at repayment; The lending product which is solely based on the accounts receivable promises of the borrower is innately having a higher risk; where the invoices might take longer to be paid in kind to the lender or to the client.

The relationship between Greenhill capital and GFG Alliance was beneficial and complementary to each other. It was only a matter of time before either of the two start showing signs of weakness and then it had to be a downward spiral for both - and also for others dependent on them. The perils in relying heavily on a client or a few clients is apparent in the situation unfolding in front of us. The hazard of having only one type of funding relationship based solely on an opaque instrument of financing in the form of invoices or accounts receivables has led the Sanjeev Gupta company to the current circumstances where no big client is ready to work with them without upfront cash payments.

As per the company portal GFG claims to have annual revenue of $20 billion with business interests in metals, alloys and energy. It will be interesting to check the actual figures when they are discounted for the help it received from Greensill. It will not be surprising if the insolvency of Greensill is a precursor to the imploding of Sanjeev Gupta led company resulting in insolvency of GFG Alliance.

Swapnil Jadhav

Banking Profesional

IIT Bombay

IIM Ahmedabad