2009 Survey of Corporate Credit Risk Management in India

REPORT

Coface copyright, conditions of use : You may copy and publish the information with the consensus of Coface, provided that you do not make commercial use of it and that you indicate clearly that it originates from Coface. The information is given without guarantee and does not bind Coface in any way.

Survey Report

1. 2. 3.

Basic information on interviewed companies Payment trends Risk mitigation strategy

BASIC INFORMATION ON INTERVIEWED COMPANIES

Background
Objectives :
To understand the general status of the credit management in companies in India To understand the domestic payment experience of companies in India.

To understand the impact of the credit crises and how it has affected payment behaviour of debtors
Payment survey done for the second consecutive time in India so the results are compared to results of survey done last year

Survey period took place from September to November 2009

5,000 companies with operations in India have been approached 905 valid questionnaires have been collected

Nature and types of companies interviewed

Public Limited Company, 732 100% Foreign Owned, 2

Types of companies
Partnership Firm, 4 Private Limited Company, 149 Proprietary Concern, 14 Joint Venture, 1 Retailing, 6

Govt Owned Company, 3

Services, 78

Trading & Wholesale, 61

Natrure of companies

Manufacturing, 760

Size of companies
1 to 9 0.33% 10 to 49 5% 50 to 99 7%

More than 500 43%

100 to 500 45%

No. of customers

1 to 9 2%

No. of employees
More than 200 44%

10 to 49 11% 50 to 99 16%

100 to 200 27%

Volume of activities : Domestic Sales

60% 58%

50%

40%

2008 2009

30%

27%

26%

20%

14% 10%

12%

13%
9% 3% 2% 9% 1%

11%

10%

5%

0% < 100 100 - 500 500 -1000 1000 - 2500 2500 - 5000 5000 - 10000 > 10000

(Figures in INR Millions)

No. of years from establishment

> 10 years 91%

5 - 10 years 6%

1 - 5 years 3%

< 1 year 0.11%

Industries of companies interviewed

Textiles / Clothing 10.72% Automotive & Ancillaries 11.49% Chemicals 10.17% Pharmaceuticals 7.07%

Industrial Machinery 6.74% Construction 6.41%

Steel, iron & metals 12.38% Others 0.33% Media 0.44% Breweries 0.44% Leather 0.88% Telecom 1.10% Computers & Peripherals 1.10% Personal Care 1.33% Shipping / Transportation 1.44% IT/ISP & Data Processing 1.77% Agriculture 1.77%

Paper & Packaging 6.08%

Food & Beverages 5.52% Industrial Electronics 4.20% Services 3.87% Consumer Electronics 2.65% Petrochemicals 2.10%

PAYMENT TREND

Open account : Not much used initially

Mostly well established companies are using open account as preferred mode of payment

90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 to 5 years 5 to 10 years > 10 years 10% 2% 13% 9% 77% 89%

2008 2009

Years of Incorporation

One answer

Open account : Preferred payment mode

Open account is the main payment mode offered by more than 60% of the companies Compared to last year, more companies have opted for advance payments and other Secured terms (e.g. Confirmed Bank Draft)

80% 70% 60% 50% 40% 30% 20% 10%

4% 3% 5% 3% 2% 5% 10% 8% 6% 17% 73% 64%

2008 2009

0% Others Cash Confirmed Bank Draft L/C Advance Payment Open Credit

One answer

Payment modes by industries

Others 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Cash Confirmed Bank Draft L/C Advance Payment Open Credit

One answer

Open Account A favorite payment mode across industries

Others Computers & Peripherals Consumer Electronics Petrochemicals Pharmaceuticals Leather IT/ISP & Data Processing Breweries Paper & Packaging Construction Telecom Chemicals Shipping / Transportation Textiles / Clothing Personal Care Food & Beverages Automotive & Ancillaries Industrial Machinery Steel, iron & metals Media Industrial Electronics Agriculture Services 0% 10%
100% 90% 79% 79% 78% 75% 75% 75% 75% 72% 70% 70% 69% 69% 67% 66% 64% 59% 57% 50% 50% 50% 43%

20%

30%

40%

50%

60%

70%

80%

90%

100%

One answer

Open Account the most important payment terms

More than 1/3rd of the companies interviewed have more than 75% of their total sales on open account

2008
40% 35% 30% 25% 20% 15% 10% 5% 0% < 10% 10% 30% 30% 50% 50% 75% > 75%
10% 22% 19% 17% 14% 37% 34%

2009

18%

18% 13%

Percentage of Open Account transactions

Open Account Transactions increasingly used

Like previous year, more than 1/3rd of the companies interviewed have increased their Open Account sales
60% 50% 40% 30% 20% 10% 0% Decreased Increased Unchanged 10% 10% 35% 36%

56%

54%

2008 2009

60% 50%

2008
49% 30% 37% 16% 52%

2009

40%
30% 20% 10% 0%

9%

3% 1% 50% 75%

2% > 75%

1%

< 10%

10% 30%

30% 50%

Sales Turnover

Open Account Mode of Payment

Open Account is the favourite mode of payment Mostly used by companies more than 10 years old Compared to last years 70%, this year 60% of the companies utilize open account as their main mode of payment

This trend is observed across all sectors

1/3rd of the companies have increased their O/A sales last year 1/3rd of the companies have more than 75% of their total sales on open account

Open Account Average payment terms

More than 70% of companies are granting upto 30 days as AVERAGE payment terms

80% 70% 60% 71.5% 74.7%

2008
50% 40% 30% 20% 10% 0% 30 days 60 days 90 days 120 days and above 20.6% 14.3% 7.7% 9.8%

2009

One answer

0.3%

1.2%

Open Account Maximum payment terms

More than 90% of the companies offer no more than 90 days of MAXIMUM payment terms
45% 40% 35% 30% 25%
27.5% 30.6% 40.6% 41.2%

2008 2009

One answer

20%
15% 10% 5% 0%

18.8%

20.1%

8.9%

4.4%
1.3% 1.7% 1.6% 1.7% 1.3% 0.2%

30 days

60 days

90 days

120 days

150 days

180 days

More

Open Account A tool to compete and expand customerbase

More than 70% of the companies interviewed are granting open accounts to face market competition
80% 70% 60% 50% 40% 30% 20% 10% 0% 64.71%

71.07%

2008

2009

22.79%

14.64%

5.88%

10.00%

3.68% 2.86%

2.94% 1.43% Others

Market Competition

You have more confidence Your clients are suffering 3rd party risk mitigation in in your customers from tight liquidity and ask place (credit insurance, for credit facilities guarantee, LC, Factoring)

60% 50% 40% 30% 20% 10% 0%

50.00%

55.28% 36.36%

2008

2009

30.65% 13.64% 14.07%

Retaining existing customer base

Enlarge existing customer base

Enhance key customer relationship

One answer

Open Account Mode of Payment (1)

Open Account Standard and maximum payment terms There is some caution from Indian companies in the way they manage their credit policy A large majority of companies are adopting a conservative approach by granting a maximum of 30 days as standard payment terms

The majority (90%) of the companies do not go beyond 90 days. Only a small % goes beyond 120 days.
When considering that 52% of companies have increased their open account sales in 2009 by 10 30%, it shows that Indian companies are still confident in the capacity of their clients to pay despite of economic environment

Open Account Mode of Payment (2)

Open Account Standard and maximum payment terms

More than 70% of the companies are granting open account to face market competition. - 55% of the companies do it to retain existing database very accurate in period of financial difficulties - 30% of the companies are looking at enlarging their existing customer base and the rest grant to enhance key customer relationship
10% of companies interviewed have more confidence in their customers which is more than 2008

Standard payment terms offered across industries

Percentage of companies interviewed Average payment terms
120 days
100% 90% 80% 70% 60% 50% 40%

90 days

60 days

30 days

30%
20% 10% 0%

One answer

Maximum payment terms offered across industries

> 120 days
100% 90% 80% 70% 60% 50% 40% 30%

90 days

60 days

30 days

20%
10% 0%

One answer

Overdue Accounts across industries (1)

DSO (Days of Sales Outstanding) for domestic sales
< 30 days
100% 90%

30 -60 days

60-90 days

90 -120 days

120-150 days

> 150 days

None

80%
70% 60% 50% 40% 30% 20% 10% 0%

Overdue Accounts across industries (2)

Overdues between 6 months & 1 year and above 1 year
Overdues between 6 months and 1 year
70%
60% 50% 40% 30% 20% 10% 0%

Overdues of more than 1 year

Overdue Accounts across industries (3)

Overdues between 6 months and 1 year (in % of total turnover)
< 0.5%
100% 90% 80% 70% 60% 50%

0.5 - 2%

2 - 5%

5 - 10%

> 10%

40%
30% 20% 10% 0%

Overdue Accounts across industries (4)

Overdues of more than 1 year (in % of total turnover)
< 0.5% 100% 90% 80% 70% 60% 0.5 - 2% 2 - 5% 5 10% > 10%

50%
40% 30% 20% 10% 0%

Overdue accounts Collection period (1)

More than 60% of companies are paid within 30 days from due date, almost 90% are paid within 60 days from due date
70%
61.77% 61.97%

60%

2008 2009

50%

40%

30%
26.48% 22.42%

20%

10%

9.52%

8.17% 3.23% 2.25% 0.97% 0.56%

0% < 30 days 30 - 60 days 60 - 90 days 90 - 120 days

2.10% 0.56%

120 - 150 days

> 150 days

Overdue accounts Collection period (2)

More than 80% of companies have up to 5% of their sales on overdue between 6 months and 1 year 95% of companies have up to 5% of their sales on overdue more than 1 year

45% 40% 35% 30%

28% 35% 32% 42%

60%
55%

2008 2009

50%

2008 2009

40%
24%

25% 20% 15% 10%

30%

31% 25%

16%

20%

21%

23%

17% 8% 7% 4%

15% 9% 3%

10%
2%

5% 0% < 0.5% 0.5 2% 2 5%

5%

0% 5 10% > 10% < 0.5% 0.5 2% 2 5% 5 10%

> 10%

Risk of Default Type of companies

Most risky types of companies in India
40%
38% 37%

35%

30%
25% 20% 15%
13%

2008 2009
26%
24% 21% 19%

10% 5%

9%

3%

4% 2% 1% 2% 1% 0% 0%

0% Proprietary Concern Private Limited Company Partnership Firm Public Limited Company Govt Owned Company

100% Foreign Owned

Govt Departments

Joint Venture

One answer

Risk of Default Reasons

Almost 1/3rd of the companies interviewed consider the customers financial difficulties as the main reason for non-payment
80% 60% 64% 2008 2009

40%
20% 0%

48%

Two answers
15% 14% 12% 14% 8% 7% 10%
Others

1%

Financial Difficulties

Management Chaos

Commercial Disputes

Fraud & lack of morality (try to avoid payment)

mostly due to lack of financing resources & fierce competition

70% 60% 50% 40% 30% 20% 10% 0% 2008 41% 48% 35% 27% 14% Lack of financing resources Fierce competition impacting margins 16% 9% Others 1% 2009

One answer

Impact of rising raw material prices

Overdue accounts Sectorwise

Most companies in various sectors have standard payment terms of 30 days Most industries offer a maximum of 60 days credit terms to their clients at the exception of Agriculture, Chemicals and Petrochemicals sectors. Most companies across industries experience DSO below 30 days. Only Consumer Electronics, Services and Shipping sectors suffer significantly from longer payment records. Short term (between 6 months and 1 year) overdues are frequent in the following sectors: Agriculture, Consumer Electronics/Industrial Electronics /Telecom/IT, Paper & Packaging and Shipping industries Long term (Above 1 year) overdues are frequent in the following sectors: Computer & Peripherals, Food & Beverage, Services, Textile/Clothing industries

Overdue accounts Overdues & Reasons

More than 60% of companies are paid within 30 days from due date (stable between 2008 and 2009)

However,
More than 80% of the companies interviewed have up to 5% of their sales on overdue between 6 months and 1 year 95% of the companies interviewed have up to 5% of their sales on overdue for more than 1 year (= a clear deterioration YoY) More than 80% of the defaults come from small and private companies (proprietary concerns, Partnership firms, Pvt. Ltd. Companies)

Financial difficulties are the main reason for default for around 65% of the companies Due to lack of financing resources Due to fierce competition impacting margins

GLOBAL CRISIS EFFECT ON COMPANYS CREDIT PERIOD

Global Crisis Types of companies being affected (= asked for extended credit terms, payment rescheduling, etc)

30% 29% 25% 22% 20% 17% 15% 14% 13%

10%

5%

4% 1%

0%
All types of companies Private Limited Company Proprietory Concern Partrnership Firm Public Limited Company Government owned company Joint Venture

Global Crisis Reasons for extended payment terms

Delays in payments from Debtors 35.06%

Decrease in sales 12.93%

Financial Difficulties 46.84% Others 0.43%

Credit restrictions from banks 4.74%

Global Crisis Expected recovery

The impact of the financial crisis on payments should start to ease by mid 2010 in India

End of 2010 28%

End of 2009 19%

Middle of 2010 53%

Global Crisis Effect on companies

SOEs and JVs were the less affected types of companies during the financial crisis, while Private Limited companies suffered most from it.
Companies asked for extended payment terms from their suppliers for two main reasons: - Financial Difficulties - Delay in payments from their debtors No significant credit crunch impact on Indian corporates. More than 50% of companies interviewed feel that payment situation in India should improve by mid 2010.

RISK MITIGATION STRATEGY

Presence of Credit Control in India

75% of the companies interviewed have proper credit management procedures
2008 2009 80% 70% 60% 50% 40% 34.70% 30% 24.33% 20% 10% 0% Yes No

75.67% 65.30%

Credit Control : Finance Department in charge

In 2/3rd of the companies, Finance department handles credit control
70% 65% 60% 2008 50% 64%

2009

40%

One answer

30% 25%

20%
16% 10% 13% 4% 0% Finance Department Sales Department Credit Management Department Others Responsibility not clearly defined 6% 3% 2% 2%

Most difficult tasks with credit risk procedures in India

Obtaining reliable information and granting appropriate credit limit and payment terms to clients are the most difficult tasks in India

40% 38% 35% 30% 25% 20% 18% 18% 15% 17% 27% 35% 30%

2008 2009

One answer

15%
10% 5% 0% Obtaining reliable information on the client Granting appropriate credit limit & payment terms Receiving payment

Managing the account receivables

Channels used to obtain credit information on customers

Market Information is more used to assess the credibility of customers; Indian companies do not use extensively third parties (information agencies, public information) to obtain information on their clients
40% 35% 30% 25% 20% 18% 15% 10% 16% 10% 11% 9% 12% 9% 20% 37% 2008 2009 39%

19%

Multiple answers

5%
0% Market Information Own on site visits Bank Information Agencies Public Information Others 0%

Channels used to obtain credit information on customers

Various information data are considered to evaluate credit worthiness of clients
30% 27% 25% 22% 19% 18% 15% 19% 19% 19% 17% 2008 2009 21%

20%

Multiple answers

10%

10% 6% 3%

5%

0% Past Trading Records Bank Reference Own on-site visits Trade Reference Financial Statements Others

Effective ways to avoid trade credit risks

Credit Insurance and In-house expertise is appreciated in India
45%
40% 35% 30% 25% 20% 15% 10% 5% 0% Credit Insurance In-house expertise Credit agency reports & recommendations Factoring Debt Collection Outsourced invoice management 12% 8% 10% 7% 13% 6% 3% 27% 36% 31%

42%

2008 2009

One answer

5%

The most used recovery action : Amicable Negotiation

Amicable Negotiation remains the favorite approach of more than 56% companies interviewed to recover overdue accounts Even Legal action is also largely used
60% 50% 40% 30% 20% 10% 0%
56% 42% 30% 36% 12%

2008 2009

4%

1%

3%

15%

0%

Amicable Negotiation

Legal Action

Request for Third Party intervention

Arbitration

Others

Multiple answers

Almost 3/4th of the companies interviewed consider Amicable Negotiation as the most effective way to recover overdue accounts
80%
60% 40% 20% 0% Amicable Negotiation Legal Action Request for Third Party intervention 19% 24% 8% 2% 1% 1% 11% Others 0% 62% 2008 2009

73%

Arbitration

One answer

Risk Mitigation : Credit Control (1)

2/3rd of companies have proper credit management procedures 1/3rd of the companies interviewed delegate to their Finance Department the responsibility of handling credit management & related functions Only 6% of the companies have their own Credit Management Department

Most difficult task with the credit risk procedures in India is obtaining reliable information on the client and granting appropriate credit limits and payment terms
Companies do not use extensively third parties (information agencies, public information) to obtain information on their clients

Risk Mitigation : Credit Control (2)

Various information data like Past trading records, trade reference, own onsite visits, Bank reference, Financial statements, etc. are considered before setting customers account

More than 40% of the companies consider Credit Insurance as the most effective way to avoid trade credit risks.
External expertise is recognized in India. However, In House knowledge remains also an imperative More than 55% of the companies use Amicable Negotiation to recover overdues since they believe this is the most effective approach Legal action is also increasingly used and proves to be effective in debt collection

THANK YOU !

Contact : Gladys Tejura / Donald Dsouza Coface India Credit Management Services Pvt. Ltd. 5th Floor, Aryston Centre Juhu-Tara Road, Opp. J.W. Marriott Hotel Mumbai 400 049 Tel. : + 91 22 26122535 Fax : + 91 22 26122541 Email : gladys_tejura@cofaceindia.com donald_dsouza@cofaceindia.com
Coface copyright, conditions of use : You may copy and publish the information with the consensus of Coface, provided that you do not make commercial use of it and that you indicate clearly that it originates from Coface. The information is given without guarantee and does not bind Coface in any way.