Economic slowdown is nothing new to hear these days butslowdown in industry credit is becoming more critical. Credit provides the life supportsystem for all economic activities and industry is much more dependent oncredit for survival and growth. Analysts commonly believe that industry credit slowdown canbe analysed in terms of rise and fall of Bank Credit (BC). This is anoversimplification. In fact, a new pattern is emerging: Trade Credit (TC) isslowing down and no one seems to have paid attention to this. Systemic changesin TC have redefined credit flows across sectors, firms and thereby pattern ofincome distribution, financial inclusion and economic growth. Its time now tolook deeper into this vital aspect of credit and its inter-relation with theoverall credit market and the economy.


Importance of Trade Credit (TC)


Trade credit i.e. business-to-business credit is animportant form of financing trade and industry. It is a critical component ofworking capital management for the firms. TC chain runs from raw materialsuppliers to manufacturers to dealers to wholesalers to retailers. World overmost inter-firm sales are made on credit terms. It permeates across firms ofall sizes (micro enterprises to large corporate) and space (small hamlets to metros).It remains the single largest source of short-term business credit in theworld. It is 1.5 times of bank loans in USA. It represents more than 1/2 ofbusinesses' short term liabilities and 1/3rd of all firms' totalliabilities in most OECD countries. In India where accessibility toinstitutional credit being limited, TC is the major source of credit formajority of businesses. Rise of Marwari community in trade and industry allover the country was greatly facilitated by availability of relation-basedtrade credit. In fact, non-financial firms also act as financial intermediarylike a bank when they take credit from their suppliers and offer credit totheir customers. This dual role is critical in multiplying credit and therebybusiness growth. A huge financial network is constructed by firms throughoffering and taking trade credit. Firms also intermediate private savings andbank credit by extending TC to their customers. Bank credit is transformed intoTC. Thus credit creation and credit absorption capacity in the economy isgreatly influenced by efficiency of TC channels. Credit flows from banks and TCchannels play a mutually supportive chain relationship.



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About the Author:


The author is DGM of SIDBI; having years of experience inthe field of SMEs in funding and working with them.


Note:The viewsexpressed in the article are personal.