India is on track to perform strongly in 2019 with GDP growth forecast for 7.2%.
However, with the economy facing headwinds such as weaker domestic consumer sentiment and the US-China trade war, companies are increasingly turning to credit insurance to ensure liquidity and protect themselves from downside risks.
Survey data from our 2019 India Payment Practices Barometer suggest that Indian companies are adopting a more liberal trade credit policy to protect their competitive position in both domestic and export markets. B2B sales transacted on credit terms increased approximately 17% over the past year to 54.7% of the total value, up from 46.6% last year. Meanwhile, 45.3% were made on a cash basis, down from 53.4% one year ago.
Electronics and services under pressure
This shift towards a more flexible trade credit policy comes as Indian companies face local and global challenges, explains Meghna Nair, Atradius’ Head of Risk Services, India.
“Business sentiment in general was weak due to the run-up to General Election on the back of uncertainty of the outcome. Also, raising money through banks and non-banking financial companies has become more difficult in recent times as they are becoming more stringent in their lending criteria impacting the business growth,” she says.
Sectors that have felt the biggest impact from the challenging trading environment are ICT/electronics and services. For instance, our survey shows that the value of overdue invoices in both sectors averaged 42% of the total value of respondents’ B2B invoices. This compares to an average of 38% for both the manufacturing and the wholesale/retail/distribution sectors, and just 35% for the consumer durables and the chemicals sectors - the lowest recorded.
The ICT/electronics and services sectors have also faced the highest percentage of B2B receivables written off as uncollectable with an average of 3.3%. By comparison, the average in manufacturing and the wholesale/retail/distribution sectors is 2.6%, with the metals sector reporting the lowest at 2.1%.
“The main factors hurting the ICT/electronics sector includes the weakened consumer sentiment in addition to temporary disruptions caused by the tensions between online/offline trade, while the services sector suffered delays in government projects ahead of the election,” notes Nair.
Managing trade credit strategically
Importantly, says Nair, late and written off payments are also having a knock-on effect along the supply chain with companies stretching payment terms to ensure they can manage their working capital and cashflow. According to our survey, an average 39% of the total value of B2B invoices issued by Indian respondents remained unpaid at the due date. This is well above the 29.8% average for Asia Pacific. In response, more respondents in India (51%) than in the region overall (41%) reported the need to delay payment of invoices to their own suppliers. In addition, 49% of respondents in India, compared to 39% in the region, said they had to stabilise cash flow and 47% (versus 29% regionally) had to pursue additional financing from external sources such as banks or factors.
In response to the more difficult trading environment, Indian businesses are taking a more strategic approach to credit management with 35% reporting they are using a balanced mix of practices. These range from the assessing a prospective buyer’s financial profile prior to any trade credit decision, to offering discounts for earlier payment of invoices. It is worth noting that hedging against exchange rate risk (to protect the business against the weakening of the rupee) as well as using specific credit management software take place markedly more often in India (31% of respondents) than in the Asia Pacific (19%). In light of this, it is no wonder that Atradius is receiving an increasing number of enquiries about credit insurance, explains Nair.
“More and more companies are taking the view that the benefits of managing risk outweigh any associated costs,” she says. “It’s becoming more important for companies to bring discipline into their own operations because if they don’t put controls in place, it will have a negative impact on their cash flow management.”
While India faces challenges in 2019, Nair says the decisive result in General Election for incumbent Prime Minister Narendra Modi bodes well for the continuation of economic reforms and growth. However, issues such as the trade war and global volatility will continue to impact sentiment and create uncertainty.
For this reason, it is paramount for businesses in India to perform an accurate assessment of their buyers’ creditworthiness by using the most up-to-date credit information. That’s why commercial credit insurance and its embedded information services remain the most effective tools to help protect your business from customer defaults, ensuring you have the financial strength and stability to thrive in India.