Credit Rating System: Need Of The Hour

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
Supertron.

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

poojas@cybermedia.co.in