As global recession looms, Asian businesses are tightening their credit management processes in a bid to minimise bad debt risks.
With COVID-19’s impact on supply chains and trade, the use of trade credit has soared. Payment delays have led to suppliers using such credit tools to guarantee their cash flow.
According to a report by credit provider Atradius, a majority of businesses throughout Asia are using one or more credit management tools to protect their accounts receivable. These range from a reduction of single-buyer concentrations and demands for cash payments, to requests for letters of credit, payment guarantees, self-insurance and the adoption of credit insurance.
The report stated that in the markets surveyed, credit-based sales grew by an average of 14 percent while at the same time the percentage of overdue invoices increased by an average of 56 percent. In India and Singapore where credit sales fell, overdue invoices still surged by 69 percent and 29 percent respectively.
Different jurisdictions tended to use different tools, based on cultural attitudes towards
credit and local responses to the economic challenges posed by the pandemic-driven threat of global recession. Bank guarantees and letters of credit are frequently used by businesses in the United Arab Emirates, for example, whereas in Hong Kong, businesses expressed an increasing interest in credit insurance as the most comprehensive tool for securing accounts receivable while promoting growth.
Nevertheless, every business in the region is committed to tighter credit management. Andreas Tesch, Chief Market Officer of Atradius, said: “With the global economy dipping into recession payment default risks are growing. We expect bad debts and insolvencies to continue rising into 2021. Suppliers need to manage reduced demand and financial stress. Minimising these burdens with thorough credit worthiness assessments and ensuring adequate financial sustainability will be key to survival for many of these businesses.”
Despite the gloomy outlook, most businesses expressed optimism that government support or bank finance would be available to help support their industries and the economy. Singaporean respondents in particular had faith in their government’s support packages to keep them afloat. A sizeable proportion of businesses across the region also expressed the belief that the coming months would feature an increased dependence on bank finance.