Economic slowdown is nothing new to hear these days but slowdown in industry credit is becoming more critical. Credit provides the life support system for all economic activities and industry is much more dependent on credit for survival and growth. Analysts commonly believe that industry credit slowdown can be analysed in terms of rise and fall of Bank Credit (BC). This is an oversimplification. In fact, a new pattern is emerging: Trade Credit (TC) is slowing down and no one seems to have paid attention to this. Systemic changes in TC have redefined credit flows across sectors, firms and thereby pattern of income distribution, financial inclusion and economic growth. Its time now to look deeper into this vital aspect of credit and its inter-relation with the overall credit market and the economy.

Importance of Trade Credit (TC)

Trade credit i.e. business-to-business credit is an important form of financing trade and industry. It is a critical component of working capital management for the firms. TC chain runs from raw material suppliers to manufacturers to dealers to wholesalers to retailers. World over most inter-firm sales are made on credit terms. It permeates across firms of all sizes (micro enterprises to large corporate) and space (small hamlets to metros). It remains the single largest source of short-term business credit in the world. It is 1.5 times of bank loans in USA. It represents more than 1/2 of businesses' short term liabilities and 1/3^rd of all firms' total liabilities in most OECD countries. In India where accessibility to institutional credit being limited, TC is the major source of credit for majority of businesses. Rise of Marwari community in trade and industry all over the country was greatly facilitated by availability of relation-based trade credit. In fact, non-financial firms also act as financial intermediary like a bank when they take credit from their suppliers and offer credit to their customers. This dual role is critical in multiplying credit and thereby business growth. A huge financial network is constructed by firms through offering and taking trade credit. Firms also intermediate private savings and bank credit by extending TC to their customers. Bank credit is transformed into TC. Thus credit creation and credit absorption capacity in the economy is greatly influenced by efficiency of TC channels. Credit flows from banks and TC channels play a mutually supportive chain relationship.

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About the Author:

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

Note: The views expressed in the article are personal.