Credit Rating System: Need Of The Hour

DQC News Bureau
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Put yourself in the following situation. You extend credit to your partner

for a period of 30 days and are awaiting payments due from him. However, on the

due date the partner approaches you and requests you to not only extend his

credit period but also for more goods so that he can recover both his margin and

the rate at which he had agreed to pay you. When you approach this partner a

third time you are told that the payments will get delayed or in a worst case

scenario, the cheque that he issues bounces. This is not an unusual situation.

Payment defaults and its repercussion can be felt by the entire IT chain as it

creates a huge cash/liquidity crunch in the market.


There is a need for a definitive credit rating policy to be put in place and

followed rigorously so that the above situations can be avoided and a healthy

business environment is maintained.

Credit Rating System:

At a time when economies across the world are facing slowdown and the

world's largest economy, the US economy, is plagued by recession, several

industries are witnessing delay in payments and rise in the number of

defaulters. The story of IT industry is no different and keeping the same in

mind, vendors have started exercising caution.

Saket Kapur,

CEO Green Vision


Hence there is a definitive need for a credit policy that not only ensures

timely payments but also a smooth business cycle.

The other benefit of a credit policy is that it gives you a clear picture

about the partner you can trust in terms of extending goods on credit, and the

ones you need to keep at bay. Thus once you have profiled the partners you are

in a better position to take accurate business decisions.

Talking about the current scenario, Delhi-based Saket Kapur of Green Vision

said, “There is a slowdown in the Indian market and the growth has reduced by

20-25 percent. Since IT outsourcing is the major contributor to the economic

growth, there is an increased dependence on the IT industry. Besides, there is

constant pressure from vendors on channel partners to make timely payments. This

need for speedy recovery is also leading to defaults in payments.”


He further added that the vendors want to be on the safer side and are hence

taking care of their own finances. This is not only leading to a number of

defaults but shortage of funds too.

Referring to the increase in defaulters that his company has witnessed, Kapur

added, “The market is not ready for such a cycle hence there is a lot of problem

that partners are facing when it comes to payment issues. My own credit policy

has gone haywire as the partners are unable to pay on time. The average cycle of

credit that at some point in time stood anywhere between 30-45 days has now

doubled. This is affecting our business.”

In such a crisis scenario, Kapur ensures he stops extending credit any

further and only does billing on the condition that an upfront payment is made.

All forms of discounts have also been stopped by the company.


The other benefit

of a credit policy is that it gives a clear picture about the partner who

can be trusted in terms of extending goods on credit, and the ones who need

to be kept at bay

“This is the transition phase. Defaults tend to increase in such times and so

there is a need to exercise caution.

It will take around 18-24 months for the situation to normalize and at the

moment people should aim at improving and having a strong physical

administration in place. This is also an apt time for putting a strong credit

system in place so that chances of defaults are minimal,” he reiterated.


Formulating policies

The credit rating system can be formulated, keeping in mind the below

mentioned points.

First come those partners who enjoy face value or good relationship with you.

Hence if the partner has been the kind who has been associated with you for

quite some time and earned the reputation and goodwill of making on time

payments, and at times even advance cash payments, then he should be one of

those who enjoy maximum credit limit. Thus both in terms of buying products at a

higher price (for example at double the price they had bought it when you had

dealt with them previously) and with regard to credit period getting extended

these partners are fended with ample flexibility.

Yet another category of partners that one can take into consideration at the

time of setting a credit rating system is that of those partners whose turnover

and bank records/statements are a reflection of the authenticity with which they

are operating in the market.


There is a need for stricter policies for those who have just recently been

added to your partner base. These partners in any case need to abide by the

internal credit policy set at the time of handing over goods to them. Hence,

such partners get goods on credit for a fixed time period depending upon the

type and quantity of product they have demanded on credit. For them the credit

period can range from anywhere between 15 to 45 days and credit limit is not

more than a few lakhs depending upon the value of the order.

“At the moment we are pushing all our partners to make timely payments, given

the current economic situation. However, we hold billings for those partners who

are unable to make timely payments and do not extend any goods on credit till

the former dues are cleared by them,” elucidated VK Bhandari of Kolkata-based


Flexibility does matter

A credit policy usually differs for the kind of products that you sell in

the market. For example for HP PC there is a credit policy of 30 days whereas

the same for an Intel processor is about 14 days. There are times when a dealer

is unable to sell the product owing to lack of demand in the market. Hence there

is a need for the credit policy to be flexible. This is also a time when the

credit rating system needs to be revised.


Rajeev Khanna of Computer Touch, Jalandhar opined that the only way to ensure

that there are no payment defaults happening at the partner's end to trust him

and give him enough flexibility. However, sub-distributors and vendors can also

look at having tie ups with banks wherein at the time of purchasing the product

they can take funds from the bank. This same fund acts as a loan for the dealer

and the bank charges certain amount of interest to him on the same. This way the

dealer is liable to pay to the bank and chances of defaults are minimal.

“Around two and a half years back HP had initiated the above mechanism to

ensure that there are minimal cheque bounces and the business runs as smoothly

as possible. This concept did work at that point in time and there were lesser

number of defaultees,” Khanna added.

As it is rightly said that with experience one learns to master the tricks of

the trade. Going by past experience it's advisable to exercise caution at the

time of formulating credit policies as the credit rating system is indeed the

mantra to survive and pursue healthy business.

Pooja Sharma