Default risk highest among proprietary firms: Survey

Followed by private limited companies, partnership firms.

Defaulting on payments is highest among proprietary companies in India, followed by private companies, according to a survey conducted by Coface, a French trade receivables’ management company. It said the risk of default was lowest in government departments.

“The risk of default in payment in India is the highest amongst proprietary firms, with a 37 per cent share. Private limited companies with 26 per cent and partnership firms with a 21 per cent share, respectively, are the second and third highest in terms of risk of default.” The survey covered 905 companies spread over 23 sectors in the country.

On reasons for the defaults, it said financial difficulties, commercial disputes and management chaos were responsible for defaults. In a few cases, fraud and lack of morality (trying to avoid payment) were seen as reasons for non-payment.

Some sectors with the highest risk of non-payment were gems and jewellery, retail malls, where fast changing fashions could hit business prospects, and textile exports.

Coface said the objective was to understand the general status of credit management used by India companies and the domestic payment experience. It also covered the impact of credit crises, especially on the payment behaviour of debtors.

The claims ratio was in the region of 48-50 per cent, world over. There was a spurt following the global financial crisis. The average claims in India for credit insurance never exceeded 25 per cent.

Elaborating on business operations in India, Samuel Jesuratnam, Country Head, Coface India, said the total risk it carried in India was ¤4 billion, while globally it was ¤370 billion. The business revenue from India for 2009 was Rs 34 crore, showing 20 per cent growth over 2008. The business activity was directly linked to level of exports into India. With improvement in the business climate, the growth was expected be around 25 per cent in calendar 2010, said Jesuratnam.

The survey, conducted for the second time in India, also states that the standard payment terms for most companies are around 30 days and most industries offer a maximum of 60 days credit terms to their clients.

Long-term overdues (above one year) are frequent in sectors like computers & peripherals, food & beverage, services, textiles & clothing. Short-term overdues (between 6-12 months) are frequent in sectors such as agriculture, consumer/industrial electronics, telecom, IT, paper & packaging and shipping.

Although Indian companies have adopted a more cautious approach to managing their credit, open account is still the main payment mode offered by more than 60 per cent of the companies.

The use of open account payment terms, a relatively unknown practice more than 10 years earlier, has now become common practice in India and other countries. The survey results show this development of open accounts is not only used to face market competition in a competitive environment but also to retain existing clients.