Treasury Today Country Profiles in association with Citi

Saudi Arabia, UAE and China amongst toughest markets for debt collection

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A new report shines a light on where it is hardest for corporates to collect debt.

Saudi Arabia, UAE, Malaysia and China are the most complex countries for debt collection, says a new report by Paris-based credit insurer, Euler Hermes.

Its ‘Collection Complexity Report’ ranked these four markets as ‘severely complex’ when it comes to debt collection, with Russia, Mexico, Indonesia, South Africa and Benin also cited.

Western European countries fared better. Sweden, Germany, Ireland and Finland were named amongst the least complex to collect.

That is not to say businesses in these countries have it easy. As the report notes: “pockets of collection complexity exist in all countries”. This complexity stems from a combination of local payment practices, local court proceedings and local insolvency proceedings.

Behind the complexity

As we found out last week when looking at payments culture in the UK, late payments are an epidemic harming many businesses.

This is not just a UK issue. The Euler Hermes report shows that in comparison to many other countries the issue is not that bad in the UK. It cites South Africa, Saudi Arabia, Mexico and Kazakhstan as being especially complex due to poor payment culture, the tendency for payment terms to be beyond 30 days and a lack of framework around payment behaviour.

The report cited India as another market with payment practices that make debt collection complex. In India, there is an average 67 days sales outstanding with no regulation around late payments.

A similar story can be found in China. Euler Hermes claims that the rebalancing of the economy is causing many companies to struggle with access to bank debt. This is resulting in the extension of payment terms, and growth in late payments as businesses desperately hang on to cash.

Complex courts

Although late payment is the catalyst for many business problems, it is to be expected from time to time. The real challenge for organisations in many markets, however, is recovering debts that have not been paid.

One reason for this, according to the Euler Hermes report, is down to the complexity of a country’s legal system. This is especially true in the Middle East and Asia where there is a lack of transparency, no fast track proceedings, and often confusion over whether foreign judgements are enforceable. The combination can make it extremely challenging for companies to collect debt.

Another source of debt collection complexity is derived from the difficulty debtors have when dealing with a country’s insolvency proceedings. The report cites an excessively complex legal framework, significant debt write-off because of renegotiations and the existence of out of court proceedings as the main causes of concern. In the worst cases, these factors can result in businesses having no chance of recovering the debt, or taking losses higher than 75% because of a lack of ‘debt write-off limitation’.

Tackling the problem

Whilst some bad debt is unavoidable, there are steps businesses can take to limit its occurrence. The first step is to take prudent credit management and model the credit risks faced by this business. To do this, the treasury team should leverage company credit ratings, when they are available. They should also factor in country-specific issues when trading with foreign-based counterparties. Value at risk techniques can then be applied to these credit risk models to determine the likely level of bad debt for a period.

The second tool available to treasurers is making provisions for bad debts. There are several ways to do this. The most appropriate technique will depend on the cash position of the company and the anticipated levels and timing of bad debts. Options include:

  • Setting aside a specific quantity of cash.

    A cash-rich company may be able to set aside cash to meet any shortfall in the event of a bad debt. Such provisions may be necessary to avoid the cash set aside being considered as taxable profits.

  • Ensuring backup lines are in place.

    Where a company does not have surplus cash to set aside, it will need to anticipate the need to replace a cash flow stream which does not materialise. This may be in the form of a backup overdraft facility or as flexibility in a commercial paper programme.

Ultimately, all companies must recognise that, however efficient their accounts receivable processes, bad debts will occur. Companies must have a strategy to ensure that missing cash flows do not affect their ability to meet their own obligations, especially when operating in some of the more complex markets.

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