Doing Business In India

In times of uncertainty and regression, the one thing that is dear to all businesses is the credit that they extend to their customers. The function becomes critical to SMEs who have limited resources.

The one question that needs to be answered is: While assessing a BUSINESS PARTNER for its Credit & Operational Risk, what elements would you consider in the following business functions?

Financials
Distribution
Goodwill
Clients
Vendors
Human Resources
Sales & Marketing
Goodwill

I asked this question to various industry professionals and academicians, the responses were:

Demissew Ejara, Associate Professor of Finance at University of New Haven “I think the list contains appropriate variables to spot operational risk. For credit risk, you should look at financial conditions and character or more specifically the five C’s of credit.”

Brian McGuinness,Vice President at Business Lenders, LLC “I always start with the 5 C’s. After that look at industry risk & concentration of sales.”

The five C’s of credit are Character (Integrity), Capacity (Sufficient cash flow to service the obligation), Capital, Collateral (Assets) and Conditions (partner’s condition and the condition of the economy).

William Martin, Sales/Relationship Manager: NBFIs at JP Morgan PLC “You are looking at 2 different elements: credit and operational risk. Each has different constituent elements but as we are seeing in current markets, operational risk can impact on credit risk and force companies out of business. When looking at credit risk, I used to consider:
History: how long has the company been in existence? How has it grown? What changes have there been?
Management: Who? Experience? Length of time in position?
Product: What is it? What is the competition, demand?
Buyers: Who? How many? Bargaining power?
Suppliers: Who? How many? Bargaining power?
Terms of Trade: What are they? Have they changed?
Turnover/Revenues: How has this changed?
Margins: Rising/falling?
Debt/Ability to obtain credit: Can they do this? Who are their bankers? How much debt have they got out?
I would count goodwill as “reputation” – an intangible asset, but one that can mean almost more than the company put together (think of Coca Cola, for example – what value does its brand have?). Media contact – tricky. This is about managing perceptions and those who are good at it can reap great rewards. Operational Risk is the risk of loss arising through fraud, unauthorised activities, error, omission, inefficiency, systems failure or from external events. It is inherent to every business organisation and covers a wide spectrum of issues. Operational risk can arise from a number of causes, including but not limited to:
Fraudulent and other external criminal activities.
Breakdowns in processes and procedures due to human error, misjudgement or malice.
Terrorist attacks.
System failure or non-availability.
In certain parts of the world, vulnerability to natural disasters.
Failure of buyers/suppliers.
Regulatory events.
Political events.
In short, operational risk arises from people, processes, systems and external events. The trick is assessing the impact of an event happening and then its likelihood. this is more of an art than a science!! Different businesses will be subject to different risks in different countries (and even different parts of the same country if, for example, one part of the country is prone to flooding).

There were some who saw the funny side of the serious question, Mohit Mehta, Director at Investment Bank “If you are CEO of a leading business risk assessment company. Please tell us how you would do this?”

In my view, it is important to follow the 5 C’s but more important would be to implement a system of Corporate Intelligence in your work flow. A robust internal credit system coupled with an efficient Corporate Intelligence system would provide the desired response to a deteriorating credit position of the businesses.

Vivek Parti, CEO, India Business Database.com, Business Credit Information Company