Survey findings for India
Decrease in B2B sales on credit reflects increase in credit risk environment
The Atradius Payment Practices Barometer survey in India reveals that respondents polled in the country transacted half of the total value of their B2B sales on credit. This is lower than the average recorded last year (55%). The decreased use of B2B trade credit in India is most probably a reflection of a heightened perception of customer credit risk, triggered by the severe impact of the coronavirus outbreak on the country’s economy, leading to a subdued outlook and an expected rise in insolvencies.
In terms of market split for B2B trade, survey findings highlight that 56% of survey respondents’ sales on credit were transacted on the domestic market (regional average for Asia: 61%), and 44% on foreign markets (regional average: 40%). This is most often the case for both SMEs and enterprises in the wholesale trade sector, who appeared to be the most likely to trade on credit terms with their B2B customers, particularly abroad.
Significantly longer payment terms accommodate need for short-term trade finance
Along with a decreased use of trade credit in B2B sales, survey findings highlight that B2B customers enjoy significantly longer payment terms than last year. This is particularly the case for SMEs and for the wholesale sector. Payment terms are on average ten days longer, at 41 days from the invoice date. This suggests that in times of severe cash flow issues, B2B buyers lean on suppliers to fill a gap in short-term trade financing.
When asked about the underlying criteria for setting payment terms, 57% of respondents reported that they set payment terms in accordance with their company standards and internal business practices, while 44% do so in accordance with industry standards. As much as 30% of respondents set individual payment terms, customised according to the credit capacity of the customer.
Payment duration in India
d = average days Sample: companies interviewed (active in domestic and foreign markets) Source: Atradius Payment Practices Barometer – June 2020
Most common credit risk mitigation technique in India: self-insurance
Consistent with the more liberal payment terms offered to their B2B customers, respondents to the India survey appear to use an almost equally balanced mix of techniques aimed at mitigating customer credit risk in these challenging times. These most often include self-insurance (92% of respondents), and the request of guarantees of payment in B2B trade (84%).
This is particularly the case for respondents from SMEs and in the retail / distribution sector. Additional customer credit risk management techniques commonly cited include: adjustment of payment terms, offers of discounts for early payment of invoices, requests for letters of credit, and trade credit insurance (each reported by as many as 80% of respondents).
of Indian respondents anticipate a significant deterioration of their B2B customers’ payment practices over the coming months
Atradius Payment Practices Barometer – June 2020
Write-offs of uncollectable B2B receivables three times higher than last year
According to survey findings, respondents in India reported having written off nearly 9% of overdue receivables as uncollectable (three times higher than the average of last year and the current average for the region). The survey also highlighted a significant increase in late payments from B2B customers. An average of 66% of the total value of B2B invoices were overdue (far above the 39% recorded last year). This compares to the 52% average for the region. Long-term overdue invoices (still outstanding after 90 days past due, with a high likelihood of turning into bad debts) amount to 29% of the total value of B2B invoices issued by respondents (regional average: 15%).
Overdue invoices are cashed in within 39 days of the invoice due date, significantly longer than the 24-day average of one year ago, and above the 27-day average for the region.
In all, the survey respondents indicated significantly lower success in debt collection than last year, consistent with the substantial worsening of the insolvency environment, particularly at country level. Survey responses showed that collecting outstanding debts was most difficult in the ICT/electronics, chemicals and pharmaceuticals industries.
When asked about the reasons for payment delays from their B2B customers, 70% of respondents in India stated that B2B customers delay payments as they use outstanding invoices as a form of financing. In order to manage the risk of liquidity constraints caused by delayed B2B payments, most of the respondents (55%) postponed payment of invoices to their own suppliers, 40% needed to strengthen their internal credit control procedures increasing time, resources and costs to chase overdue payments, and almost the same percentage (39%) needed to pursue additional financing from external sources.
As a key driver of working capital, businesses should focus their attention on account receivables, and specifically the efficiency of their turnover through a strategic approach to credit management. These strategies should aim at protecting their balance sheet from losses, and remain financially sound particularly, but not only, in times of economic uncertainty.
Uncollectable B2B receivables in India
(% of total value of B2B receivables)
Sample: companies interviewed (active in domestic and foreign markets) Source: Atradius Payment Practices Barometer – June 2020
Poor outlook for B2B customers’ payment practices
Respondents in India are deeply pessimistic about the payment practices outlook for their B2B customers over the coming months, with a vast majority (70%) of respondents anticipating a significant deterioration. In particular, the default risk is expected to increase in the agriculture, construction and machines industries, as well as in the hospitality sector, with negative repercussions on the cash flow and investment capacity of the businesses.
In response, many businesses are planning on further strengthening their credit management procedures, with 62% of respondents planning on resorting to self-insurance. In addition, many respondents anticipate requesting guarantees of payment more often, or seeking to avoid the concentration of trade credit risk on single buyers in their customer portfolios.
9 in 10
respondents in India are concerned over a deterioration of their working capital cycle and short term financing flexibility
Atradius Payment Practices Barometer – June 2020
Dependence on bank finance expected to increase due to cash flow constraints
Consistent with the challenges posed to the country’s economic performance by the pandemic-induced domestic containment policies and the global economic downturn, survey respondents in India expressed concern over their working capital cycle and short-term financing flexibility. For 9 in 10 respondents, this will increase dependence on bank finance. However, 83% of respondents believe that the liquidity injected into the economy by the banking system will largely contribute to offset the impact of the economic crisis on the business community.
Displaying an optimistic mindset, 95% of the India survey respondents expect their business performance to improve significantly over the coming months. In particular, respondents expect a recovery of investments (67%) and household consumer demand (57%) to have a positive impact on their business. 37% of respondents, chiefly from large enterprises and in the wholesale trade sector, expressed concern about the negative impact of an increasing exchange rate volatility on their export flows over the next 12 months.