News

Low trust & confidence hit Trade Credit Ecosystem

Low trust & confidence hit Trade Credit Ecosystem: Expert

Trade Credit (TC) which is an integral and known way to make payments in the businesses have been paralysed due to low trust and confidence following COVID-19 pandemic, said B L Chandak, Ex-DGM, SIDBI.

Apart from these, Chandak also said that issues like credit indiscipline which heightened credit risk perception, credit inadequacies, payment crisis on macro-level output, productivity, aggregate credit and banks are of systemic proportion too has affected TC.

''The prime cause for this is systemic disruptions in credit and payment flow in trade credit [TC] network,'' he said.

He further said that banking sector distress is basically a manifestation of interconnectivity-cum-feedback effects of dysfunctional TC adding, ''It is becoming systemic. Unorganised sector is facing the prospect of solvency-liquidity contagion.''

''Any loss of faith in the credit-based payment system results in more cash-based and fewer credit-based transactions. Unprecedented spurt in currency supply despite recession and spurt in digital payments reflects this,'' he added.

Banks supportive measures, higher public expenditure, monetary easing, policy reforms and external fund inflows can’t stimulate growth to the desired levels as ultimately the finance has to travel through the TC network – the prime base of working capital finance.

''Growing deterioration in TC system integrity needs to be handled fast and effectively; else it can lead to chaotic and contagion conditions in both real and financial sectors.'' he asserted.

Chandak further said that for strengthening TC network, trade associations’ role is crucial in reinforcing transactional and environmental trust and generalised credit discipline in TC ecosystem.

The government may accredit select industry associations to work for self-discipline/self-regulation, prompt payment and encourage them to take collective action against TC renegades.