TC= Trade Credit
Over the years TC was working more or less smoothly until it faced a systemic disturbance since late 1990s. Negative liquidity shock arising from disruptive developments in FS in post-1997 period as described above led to disruptions in continuous circulatory flow of credit. This resulted into default/delays in payments to suppliers. Effects of the unanticipated defaults/delays in TC payments propagated to many firms through TC network. Many firms faced credit-default-led financial sickness. It heightened credibility concerns about trade debts.
Upward shift in risk perception in TC has been reinforced by decadence of credit culture in the recent times. Feeling of moral guilt/shame and social stigma attached to default /bankruptcy maintain trust and integrity in TC. These values are now on wane. Further, it does not handicap a defaulter/bankrupt to continue his business. Cases of purposefully delaying/defaulting on credit while having repayment capacity are on rise. Not punishing a firm that behaves opportunistically encourages further opportunism. These undermine integrity in business dealings; the very ethical basis upon which the economic society stands. Uncertainty stemming from credibility concerns about trade-debtors and weak contract enforcement impact efficiency and normal working of TC.
Today credit sales carries higher risks of bad debts, delays, uncertainty, higher realisation costs and even possibilities of spoiling business relations. Businesses now adopt a pre-cautionary approach in extending TC. They become very selective in credit matters. TC flows become skewed in favour of large/ reputed firms and firms with regular dealings. Small, young and financially weak firms even with sound base find it difficult to get TC which is essential for their survival, growth and getting bank credit at later-stage. With tightening of TC to new businesses, the signaling effect of TC to bank credit for the new units is now muted. TC tightening also increases risk for bank credit as it affects efficiency of a firm's working capital management.
No comments:
Post a Comment