While all eyes are on Asia to see if it remains a growth engine for the world economy, there is at least one worrying sign that may dampen the region’s growth trajectory: worsening credit risks among Asian companies.
Two-thirds (67%) of Asia-Pacific enterprises reported overdue payments from their customers last year, up two percentage points from 2011. Of these, 43% said the overdue amount had increased compared with 29% in 2011, according to a survey published by Coface, a global credit insurance group.
The survey polled 2,274 companies in Australia, China, Hong Kong, India, Japan, Singapore and Taiwan between October and December 2012 to compare their payment situation and credit risk management practices.
The overdue situation was particularly bad among companies in Australia (where 83% reported a problem) and China (77%), where 56% of companies also indicated their overdue amount had increased (up from 42% in 2011). In India, 60% of companies with overdue payments had more than 2% of their receivables delayed for six months or longer – the longest compared with the other countries that were surveyed.
“In our experience, companies with more than 2% of long overdue accounts against turnover could have liquidity problems and a high risk of non-payment to their suppliers,” said Richard Burton, CEO of Coface for Asia Pacific.
Burton said the high value of the Australian dollar made the country’s goods more expensive for both the export and domestic markets, exacerbating late payments there.
In India, high inflation has prompted the central bank to pursue a tight monetary policy, forcing Indian businesses to rely heavily on suppliers’ credit to finance their operations.
“We have seen the situation worsening, particularly in India,” said Hudson Tsui, FCMA, CGMA, the Asia-Pacific finance director of a global media company. “Indian companies have always been one of the longest debtors in the region. The global financial crisis, coupled with the recent depreciation of the Indian rupee, may be the main factors delaying their payment, especially overseas.”
In spite of the delays, Tsui said his company has not extended credit terms for its customers. He stressed that most Indian companies do eventually pay up and that the company has adopted various measures to deal with the situation.
“To speed up debt collection, our strategy is to increase our frequency in reviewing the debtor’s status with our sales team. We are looking at the more significant debtors at least once every week or two weeks,” he said. “In addition, with our legal team we have redrafted a set of dunning letters [notifications sent to customers whose payments are overdue] for our debtors. We have also engaged an external debt-collecting agent for the most extreme cases.”
The China slowdown
In China, the Coface survey revealed that several industries have been particularly hard-hit by worsening credit risk as a result of the economic slowdown and deteriorating operating environment in 2012. Private companies are the riskiest type of corporate customers, as many small and medium enterprises were battered by substantial wage increases and had problems accessing financing, Coface reported.
The paper and printing industry was the most affected, with 71.4% of companies (versus 47.6% in 2011) reporting an increase in the overdue amount last year. Half of the companies in the sector (versus 23.8% in 2011) reported overdue payment for more than 60 days. Other badly affected sectors included textile and clothing, telecommunications, and steel and iron.
Paul Chen, FCMA, CGMA, is the Greater China finance director of MeadWestvaco (China) Holding Co. He said China’s paper and printing industry has been going through a rough patch in recent years, with many companies going out of business because of an overcapacity in paper production and a drop in the price of paper pulp. A lot of these companies failed to cope with the prolonged credit terms and late payments, which resulted in operating cash-flow problems.
Credit terms used to be 30 to 60 days in the printing business, but now it is more likely to be 90 to 120 days, depending on customers’ bargaining power.
Debt collection has become more difficult because a growing number of customers have switched from local offices to centralised operations via shared service centres. In the past, the client company’s structure was decentralised and more people-driven, while the new setup is more process-driven.
Chen said it was not uncommon in the paper industry for customers to ask a supplier to do reconcilliation or set other requirements in validating the delivery of goods, which could delay payments.
Some customers will pay with a commercial bill – also called a bill of exchange – which is a payment order directing their bank to pay a sum of money to the holder of the bill at a future time, thereby buying themselves another three to six months. Others will pay via a bank guaranteed payment scheme in exchange for a longer credit term.
Eight ways to ease the payment crunch
Chen recommends companies consider the following credit management measures to tackle the situation:
Conduct a customer credit check with an outsourced partner to determine the open term and open credit days.
Hold weekly internal meetings to review the accounts receivable and then have the sales team call customers with overdue payments.
Hold a monthly management meeting to make risk assessments and track overdue payments, then decide whether to deliver or stop shipping to particular customers.
Devise a bad-debt provision policy to give shorter credit terms to high-risk and overdue accounts.
Accept fewer or no commercial bills.
Conduct continuous process improvements to reduce the risks on customer disagreement and late payment.
Measure performance on operation based on the overdue percentage to total open accounts.
Train staff to strengthen debt collection efforts.
It seems unlikely that the credit risks facing companies in Asia will abate any time soon. Nearly 70% of companies surveyed by Coface, particularly those in Australia, China and Japan, believe the slowdown in the global economy will not end this year.
Coface said the unresolved debt crisis in the euro zone and the slow recovery of the US market make most companies doubtful about the recovery in 2013 and that the credit risk management function is expected to play a more important role in the operation of Chinese companies after a difficult year.