vendor payment

Economic Times has reported that large companies are planning to defer their payments to suppliers because of tight liquidity positions caused by the Covid-19 lockdown. For example, Tata Steel may delay payments by 45 days and Asian Paints by 30 days. Both these companies are respectable leaders in their respective industry. We view this development with concern for several reasons.

There is no doubt that these are difficult times for all business units. Every company has to try to solve its problems as much as possible without shifting the problems to other stakeholders. Let us now see if companies like Tata Steel and Asian Paints can mitigate their liquidity travails without endangering the liquidity of their vendors.

These companies are valuable customers for their banks. Credit Risk posed by them to the banks is the least. When banks are having surplus funds for lending, their customers of choice will be the likes of Asian Paints with creditable credit history. Banks are now sitting on a mountain of liquidity. As on April 15, the funds placed in Reverse Repo amount to Rs.6.9 lakh crore. This has even resulted in RBI reducing the Reverse Repo Rate from 4% to 3.75% on April 17 sending a clear signal to banks that they must lend more and depend less on depositing money with RBI.

Companies with good track record must make use of their easy access to banks and borrow more. This will create a win-win situation for both the lender and the borrower. The benefit for the banks will be the opportunity to lend to better-rated customers with potential for easier and timely recovery. Logically banks will treat this as a heaven-sent blessing. These large companies will also be able to retain the goodwill of their vendors who will respect the companies for standing by them even in perilous circumstances. This will ensure seamless movement of funds from banks to large companies and from these companies to  vendors many of whom are MSMEs. If this flow of funds does not happen, MSMEs which are already in dire straits will be forced to approach their banks for enhanced loans. The ground reality is that banks are more hesitant to increase their exposure to units whose credit history is already dented by adverse economic circumstances.

There is a long benign chain effect in the process. Vendors who are promptly paid by these large companies will be in a position to service their suppliers in time and the chain goes on.

An additional benefit the banks can reap in the process is the requirement to monitor a few well-maintained accounts instead of spending sleepless nights involved in dealing with too many customers. The consequent round of benefits accrues to the bankers of these vendors as the latter will be in a position to honour their bank dues on time. There are many instances where the banker to a large company is also the banker its vendors.

Tough times do not necessarily call for tough decisions. Postponing payments to vendors is a tough decision which will have snowballing  adverse impact on the economy. If banks and their large corporate customers get their act together and quickly exploit the opportunity to facilitate purposeful cashflows without taking undue risk, they will ensure their health apart from playing a productive part in sustaining the economy.

Supply Chain Management and Channel Financing: Extended lockdowns are a threat to sustenance of supply chain. Disruption of cashflows in any part of the chain will have its inexorable negative impact on the entire chain thereby posing a logistics problem. Success of channel financing depends not only on the willingness of the banker to lend to the channel partners  but also on the readiness of the manufacturer to come to the rescue of any entity in the supply chain who may be facing liquidity constraints. It is hoped that large companies and their banks will rise to the occasion and thereby quicken the economic recovery process.