Credit Issues Strangle Business

Credit is an integral part of any business. But very few creditors can boast of good credit experiences. With more and more traders getting into the business, competition has become razor sharp. At the same time, margins have shrunk. So channel partners use credit to push sales and enter a vicious circle where the desired outcome, greater sales, may happen to a certain extent but the money hardly comes in.

The main issue that plagues the market is a lack of discipline in honoring commitment as far as credit is concerned. Says Manish Goel, Sonal Infosoft, "We give a credit of 15 days to our resellers, however they stretch this and we are able to realize the money only after 20-21 days. An extension of one week in credit disrupts our credit cycle."

Echoing the same views is Sanjay Varmani, Groovy Communications, "In the reseller community, there is no sanctity about commitment". The distributors have a grouse that their credibility is at stake due to lack of discipline displayed by resellers.

The pertinent question that crosses the mind is whether the entire reseller community is undisciplined. AK Pandey, Miraj Marketing feels that there is not all resellers are credit defaulters. But he adds in the same breath, "I am contemplating to stop doing business on credit."

Since margins have become wafer-thin, even a small percentage of bad debts hurt the dealers. The industry thrives on high volumes and this is precisely what is becoming the bane of the industry. "In order to generate high volumes, resellers are pushing sales vigorously and this results in credit reaching the wrong hands" says Pandey.

The element of credit cannot be eliminated from any business, so what how can this problem be tackled? And a chorus that is heard from across the board is that a system should be created to flush out people from the trade who show an utter lack of respect to payment on time.

Another issue that traders complain about is the inactivity of the various associations who seem to be sleeping through all their members’ problems. Turning a blind eye to the unscrupulous activities has disillusioned many a reseller. Some are even decided to stop providing credit to their dealers. One such reseller is Groovy Computers.

Says Varmani, "I have shifted focus from the reseller to the end-customer. I have actually not sold a single product to any reseller in the past two months." On being probed whether credit was a reason for his decision, he replied in the affirmative and added that there were others too! He quipped that despite the enormity of the credit issue, the associations were waiting for an even massive jolt to wake up from their slumber.

But can the blame he laid only at the associations’ door? Are there no precautions that traders themselves can take before doing business on credit terms? Most distributors and principals take all the care not to be associated with people who lack the commitment and the fiscal fitness.

"We not only assess the track record of new dealers, but also ask for documentary proof to support his claims of sound financial health," says Jitender Trikha, General Manager (Operation), Aditya Technologies. He also adds, "We set a maximum exposure limit (MEL) for our dealers and do incorporate a degree of flexibility in that. But by and large we don't stray away from it. MEL also helps us to keep track of our risk exposure." Sanjay Dhuria, Product Manager, Summit Infotech agrees with this approach. He further adds that defaulting on payments by their partners is taken very seriously.

There is a dire need to frame ground rules that are applicable to all to decrease debt levels in the market. But just how effective will it be? Since most of the credit transactions are relationship-based, it will become extremely difficult to implement them. "Setting some rigid credit rules might not work in such a competitive industry. However, a flexible credit policy is needed that will guide the principles and dealers" said GJ Kulkarni of Samtech InfoNet Ltd.

The Nehru Place market has become an arena for defaulting parties. The large numbers of resellers coupled with a fragmented market discounting products to ensure survival has compounded the problem. Resellers buy goods on credit for 15 days and further sell them by discounting or offering credit for another two or three days. This means that the credit turnover of the inventory is thrice over what is offered by the distributor.

A gross misuse of credit has shaken the distributor’s trust in their resellers. "Given an opportunity, I will quit the Delhi market and fervently hope that resellers in other cities don't start picking up cues from here" says Keshav Madhav of Vidur and Co.

This is a stark reality that the market has now started to live with. Practices that are unethical have become the rule rather than the exception. A proper policing mechanism might not eliminate the defaulting element, but will definitely curb them. It is time the reseller community in Nehru Place woke up to the reality and played a fair credit game.