Receivables

UNIT 14 RECEIVABLES MANAGEMENT Management

Structure Page Nos.

14.0 Introduction
14.1 Objectives
14.2 Terms of Payment
14.3 Credit Policy Variables
14.4 Credit Evaluation
14.5 Monitoring Receivables
14.6 Factoring
14.7 Non-Performing Assets
14.7.1 Provisions for NPAs
14.7.2 Reasons for growing NPAs
14.7.3 Suggestions to reduce NPAs
14.7.4 NPAs Recovery Mechanism
14.8 Summary
14.9 Key Words
14.10 Answer to Check your Progress
14.11 Self-Assessment Questions/Exercises

14.0 INTRODUCTION
In the previous unit, we have seen how firms determine their needs for current assets
and manage their holdings in cash and marketable securities. In a typical
manufacturing company the debtors to total asset ratio varies from 20 to 25% which is
a considerable investment of funds. The effective management of this asset will have
a significant effect on the profitability of the company. The receivable (debtors) arise
due to credit sales, which is undertaken in order to encourage customers to purchase
goods or services. Accounts receivable use funds, and tying up funds in these
investments has an associated cost which, must be considered along with the benefits
from enhanced sales of goods and services. In this unit we are going to discuss the
various issues involved in management decisions of extending credit (i.e., accounts
receivable). We shall also discuss the issues pertaining to Non- Performing Assets.

14.1 OBJECTIVES
After going through this unit, you should be able to:

 understand the need for establishing sound credit policy;

 identify the various credit policy variables;
 understand the credit evaluation process;
 describe the techniques of monitoring receivables;
 understand the concept of factoring and;
 explain the issues involved in managing Non- Performing Assets.

14.2 TERMS OF PAYMENT

Terms of payment vary widely in practice. At one end, if the seller has financial
resources, s/he may extend liberal credit to the buyers, on the other hand the buyer
pays in advance and finances the entire trade cycle. The terms of credit vary for
different industries and are dictated by prevailing trade practices. In general,
businesses operating in monopoly environment will insist on advance/cash payment
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Working Capital whereas business operating in a competitive environment will extend credit to the
Management buyers. The major terms of payment are listed below: Let us discuss them in brief.

Cash Terms

When goods are sold on cash terms, the sales consideration (payment) is received
either before goods are sold (advance payment) or when the goods are delivered (cash
on delivery) Cash term generally exist under the following conditions:
(a) when goods are made to order
(b) when the buyer is perceived to be less credit worthy
(c) the seller is in strong bargaining position.

Open Account

A credit sale is generally on open account which implies that the seller ships the goods
to the buyer and thereafter sends the bill (invoice).

Consignment

Under this type of terms, the goods are merely shipped to the consignee; they are not
sold to the consignee. The consignee then sells these goods to the third party. One
should note here that the title of the goods is retained by the seller till they are sold by
the consignee to the third party. Sales proceeds are remitted by the consignee to the
seller.

Negotiable Instruments/Hundi

When the goods are sold on credit either through an open account or through
consignment, a formal legal evidence of the buyers obligation is not created. In order
to overcome this, a more secure agreement usually in the form of a draft is sought. A
draft represents an unconditional order issued by the seller to the buyer asking the
buyer to pay on demand (demand draft) or at some future certain date (time draft) the
amount specified on the draft. The draft is usually accompanied by the shipping
documents that are deliverable to the drawee when he pays or accepts the draft. Time
drafts can be discounted with the bank. The draft performs four useful functions:

(a) it creates an evidence of buyer obligation

(b) it helps in reducing the cost of finance
(c) it provides liquidity to the seller
(d) it is a negotiable instrument.

Letter of Credit

Under the documentary bills the seller faces a lot of risk  the risk of non-payment or
non-acceptance of goods. This poses a major risk for the seller. This additional
security under this method comes from the fact that, the letter of credit is issued by the
bank and not by the party to the contract buyer. This instrument guarantees payment
to the seller on fulfilment of certain conditions specified therein. The Letter of Credit
can be defined as an instrument issued by a bank in favour of the seller (known as
beneficiary) whereby the issuing bank undertakes to pay the beneficiary a certain sum
against delivery of specific documents within a stated period of time. There are many
forms of a letter of credit and the most widely used are as follows:

1) Revocable vs. Irrevocable Letter of Credit

2) Confirmed vs. Unconfirmed Letter of Credit
3) Revolving Letter of Credit

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4) Transferable Letter of Credit Receivables
Management
5) Back to Back Letters of Credit
6) With Recourse vs. Without Recourse Letter of Credit.

14.3 CREDIT POLICY VARIABLES

Each company should establish its own credit policy depending upon the ground
situation and the environment in which it is operating. The main objective of the
credit policy is to stimulate sales as well as control expenses and bad debts associated
with granting credit. Let us discuss the main components of a credit policy.
1) credit period to be allowed to general customers
2) credit period to be allowed to special customers and the criteria for defining
special customer to be predefined
3) credit rating system
4) cash discount policy or discount policy for pre-payment by debtors
5) collection policy
6) accounting system and management information system (MIS) for scrutiny
and efficient management of debtors
7) policy for dealing with bad and doubtful debts
8) credit insurance cover
9) proper documentation of credit sales.

If we regroup the above components they can be classified under the four dimensions
of a firm’s credit policy which are as follows:
a) credit standards
b) credit period
c) cash discount
d) collection effort.

Deciding on the credit policy involves a trade off between sales and expenses/losses.
Decreasing credit standards would increase sales but at the same time would lead to
increase in bad debt losses. The same is true for other variables of credit policy also.
Now let us examine the effect of each of these variables on the net profit on the firm.

Credit Standards

This variable deals with the granting of credit. On one extreme all the customers are
granted credit and on the other extreme none of them are granted credit irrespective of
their credit rating, but in today’s competitive environment this is not possible. In
general liberal credit standards lead to increased sales accompanied by higher
incidence of bad debts, tying of funds in accounts receivable and increased cost of
credit collection. Stiff or tight credit standards lead to decreased sales, lower incidence
of bad debts, decreased investment in accounts receivable and decreased collection
cost.

The quantitative effect of relaxing the credit standards on profit can be estimated
by the equation 2.1

 NP  [ S (1  V )   S bn ](1  t)  kI (2.1)

where
 NP = Change in net profit
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Working Capital S = Increase in sales
Management V = Ratio of variable cost to sales
bn = Bad debt ratio on new sales
T = Tax rate
K = Cost of capital
I = Increase in receivable investment
S
I =  ACP  V
360
S
= Average daily change (increase in sales)
360
ACP = Average collection period

Now let us see how each component of equation 2.1 affects net profit.  S (1V)
represents the increase in gross incremental profit, due to relaxed credit standard and
for this purpose gross profit, is defined as Sales-Variable cost.  Sbn calculates the
bad debts on incremental sales. The first part of the equation [  S (1V)   Sbn]
(1-t) represents the post tax operating profit arising out of incremental sales and k  I
measures the post tax opportunity cost of capital locked in additional investment on
account of relaxed credit standards. The pre tax operating profit is multiplied by (1t)
in order to get past tax operating profit.

Example 2.1: The current sales of M/s ABC are Rs.100 lakhs. By relaxing the credit
standards the firm can generate additional sales of Rs.15 lakhs on which bad debt
losses would be 10 per cent. The variable cost for the firm is, 80% percent average
collection period ACP is 40 days and post tax cost of funds is 10 percent and the tax
rate applicable to the firm is 40 percent. Find out whether the firm should relax credit
standards or not?

Solution:

 NP = [  S (1V)   S bn] (1t)  k  I

15
 NP = [15 (1.80)  15  .1] (1.4) .10   40  .80
360
= [3 1.5] (.6) .1333
=.9 .1333
=.7667  1, 00,000
=76,667

Since the impact of change in credit standards results in a positive change in net
profits therefore the proposed change should be accepted.

Credit Period

Credit period refers to the length of time provided to the buyer to pay for their
purchases. During this period no interest is charged on the outstanding amount. The
credit period generally varies from 30 to 90 days and in some businesses even a period
of 180 days is allowed. If a firm allows 45 days of credit with no discount for early
payment credit terms are stated as ‘net 45’. In case the firm allows discount for early
payment the credit terms are stated as 1.5/15, net 45’ implying that if the payment is
made within 15 days a discount of 1.5 percent is allowed else the whole amount is to
be paid within 45 days.

Increasing the credit period results in increased sales but at the same time entails
increased investment in debtors and higher incidence of bad debts. Decreasing the

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credit period would have the opposite result. The effect of increasing the credit period Receivables
Management
on net profit can be estimated with the help of equation 2.2.

 NP = [  S (1V)   Sbn] (1 t) – k  I (2.2)

In this case  I is calculated as follows:

 50  S
 I = (ACPn  ACP0)    V(ACPn ) 360 (2.2a)
 360 

Where  I = increase in investments

ACPn = new average collection period

ACP0 = old average collection period

In equation 2.2a the first term represents incremental investments in receivables

associated with existing sales and the second term represents the investment in
receivables arising from incremental sales.

Example 2.2: M/s ABC has an existing sales of Rs.50 lakhs and allows a credit
period of 30 days to its customers. The firm’s cost of capital is 10 percent and the
ratio of variable cost to sales is 85. The firm is contemplating on increasing the credit
period to 60 days which would result in increased sales of Rs.5 lakhs. The bad debts
on increased sales are expected to be 8 percent. The tax rate for M/s ABC is 40
percent. Should the firm extend the credit period?

S0 S
Solution:  I = (ACPn ACP0) [ ]  V ( ACPn )
360 360
 50  5
I  (60  30) 
 360   .85  60  360
50
I  30   .708333
360
I  4.8749997  1,00,000  4,87,500  4,874,99.9

 NP   S (1  V )   Sb  n
(1  t )  k  I
 [5 ( 015 )  5  .08 ] (1  04 )  .10  4 ,87 ,500
 [. 75  .4 ] (. 6 )  4 .875000
 (. 35 ) (  6 )  .48750
 (. 21  .48750 )  1,00 ,000
  27 ,750

The increase in credit period results in a negative net profit therefore the credit period
should not be extended.

Cash Discount

Cash discount is offered to buyers to induce them to make prompt payment. The credit
terms specify the percentage discount and the period during which it is available.
Liberal cash discount policy imply that either the discount percentage is increased or
the discount period is increase. This leads to enhanced sales, decrease in average
collection period and increase in cost. The effect of this on net profit can be estimate
by the equation 2.3.

NP  [ S (1  V )  DIS ] (1  t )  kI (2.3)

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Working Capital
Management Where  I = Savings in receivables investment

 DIS = Increase in discount cost

S0 S
I= ( ACP0  ACPn )  V ACPn (2.3a)
360 360
 DIS = Pn (S0  S) d n  P0S0 d 0 (2.3b)
Where Pn = Proportion of discount sales after liberalizing the discount terms.
S0 = Sales before liberalizing the discount terms
 S = Increase in sales
dn = New discount percentage
P0 = Proportion of discount sales before liberalizing the discount terms
d0 = Old discount percentage

Example 2.3: M/s ABC’s present credit terms are 1/10 net 30 which they are planning
to change to 2/10 net 30. The present average collection period is 20 days and the
variable cost to sales ratio is 85 and the cost of capital is 10 percent. The proportion
of sales on which customers currently take discount is .5. After relaxation of discount
terms it is expected that the ACP will reduce to 14 days, sales will increase from
Rs.80 lakhs to Rs 85 lakhs and the proportion of discount sales will increase to .8. Tax
rate for the firm is 40% calculate the effect of above changes on net profit.

S0 S
Solution:  I = ( ACP0  ACPn )   ACPn
360 360
80 5
= (20  14)  .85   14
360 360
= 1.1680555 lakhs
 DIS = Pn (S0+  S) dn –P0S0d0
= .96 lakhs
 NP =  S (1  v)   DIS ] (1  t )  k I
= [5 (1  .85)  .96] (1  .4)  .1 1.1680555
= (.75  .96) (.6)  .116805555
=  .126 + .11680555
=  .009194 lakhs

Since the increase in net profit is negative the cash discount policy should not be
liberalized.

Collection Effort

The collection policy of a firm is aimed at timely collection of overdue amount and
consists of the following.

1) Monitoring the state of debtors (account receivable)

2) Reminders
3) Personal letters
4) Telephone calls
5) Personal visit of salesman
6) Restriction of credit
7) Use of collection agencies
8) Legal action.

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An efficient and rigorous collection program tends to decrease sales, shorten average Receivables
Management
collection period, reduce bad debts percentage and increase the collection expenses,
whereas a lax collection program will have just the opposite effect. The effect of
decreasing the collection effort on net profit can be estimated with the equation 2.4.
 NP = [  S (1V)   BD] (1 t)  k  I
Where  BD = increase in bad debt cost
 I = increase in investment in receivables

S0 S
I  ( ACPn  ACP0 ) ACPnV
360 360
BD  bn ( S 0  S )  b0 S 0

Example 2.4: M/s ABC is considering relaxing its collection efforts. At present its
sales are Rs.40 lakhs, the ACP is 20 days and variable cost to sales ratio is .8 and bad
debts are .05 per cent. Relaxation in collection effort is exected to push sales up by
Rs. 5 lakhs, increase ACP to 40 days and bad debt ratio to 0.06. ABC tax rate is 40
percent. Calculate the effect of relaxing credit effort on net profit.

Solution:
 BD = bn (S0+  S) –b0 S0
= .06 (40+5) - .05  40
= 2.7-2
=.7 lakhs

S0 S
I  ( ACPn  ACP0 )  ACPnV
360 360
40 5
 (40  20)   40  .8
360 360
20 4

9 9
I  2.6666667
NP  [ S (1  V )  BD] (1  t )  kI
 [5 (.2)  .7] (.6)  .12 (2.666667)
 .18  .32
= .14 lakhs

Since the effect on net profit is negative therefore the credit efforts should not be
relaxed.

Check Your Progress 1

1) As a part of the strategy to increase sale and profit, the sales manager of the
company proposes to sell goods to a group of new customers with 10% risk of
non-payment. This group would require one and a half months credit and is
likely to increase sales by Rs. 1, 00,000 per annum. Production and selling
expenses amount to 80% of sales and the income tax rate is 50%. The
company’s minimum required rate of return (after tax) is 25%. Should the
Sales manager’s proposal be accepted?

2) Manjit Ltd. is examining the question of relaxing its credit policy. It sells at
present 20,000 units at a price of Rs. 100 per unit, the variable cost per unit is
Rs. 88 and average cost per unit at the current sales volume is Rs. 92. All sales
are on credit, the average collection period being 36 days.

A relaxed credit policy is expected to increase sales by 10% and the

31
Working Capital average age of receivables to 60 days. Assuming 15% return, should the firm
Management relax its credit policy? Assume 360 days in a year.

3) A company wants to adopt a stricter collection policy. While going through its
books the following details are revealed:

The enterprise is at present selling 20,000 units on credit at a price of

Rs. 30 each, the variable cost per unit is Rs. 23 while the average cost per unit
is Rs. 27. Average collection period is 56 days and the collection expenses
amount to Rs. 8,000 and bad debts are 3%. If the policy of collection is
tightened a sum of Rs. 15,000 more will be required as collection charges. Bad
debts down to 1 percent and collection period will reduce to 40 days. Sales
volume is expected to reduce by 400 units.
Advice the company whether it should implement the decision or not. Assume
20% rate of return on investments.

4) The present credit terms of Padmavati Ltd. are ‘1/10 net 30’. Its annual sales are
Rs. 80, 00,000, and average collection period is 20 days. Its variable cost and
average table costs to sales are 0.85 and 0.95 respectively and its cost of capital
is 10 per cent. The proportion of sales on which customers currently take
discount is 0.5. The company is considering relaxing its discount terms of ‘2/10
net 30’. Such relaxation is expected to increase sales by Rs. 5, 00,000, reduce
the average collection period to 14 days and increase the proportion of discount
sales to 0.8. What will be the effect of relaxing the discount on the company’s
profit? Take year as 360 days.

14.4 CREDIT EVALUATION

One of the important elements of credit management is the assessment of the credit
risk of the customer. While assessing risk two type of errors occur which are as
follows?

Type 1 error: Good customers are misclassified as poor credit risk

Type 2 error: Bad customers are misclassified as good credit risk.

Both the errors are costly. Type 1 error leads to loss of profit on sales and also loss of
good customers. Type II errors leads to bad debts and other costs associated with the
bad debts. These type of errors can’t be totally eliminated but a proper credit
evaluation process can reduce these two types of errors. The credit evaluation process
involves the following steps.

1) Credit information
2) Credit investigation
3) Credit limits
4) Collection policy.

Credit Information
In order to ensure that the receivables are collected in full and on due date from the
customers, prior information of their credit worthiness should be available. This
information can be gathered from a variety of sources, which we are going to discuss
shortly. One important thing which needs to be kept in mind while gathering credit
information is that collecting credit information involves cost, therefore the cost of
collecting information should be less than the potential profitability of credit sales.
Another factor which should be borne in mind is that collecting credit information
may involve a lengthy period of time, on account of this the credit granting decision

32
should not be delayed for long. Depending upon these two factors any or a Receivables
Management
combination of the following process may be employed to collect the information.

 Financial Statements: Profit and loss a/c and Balance sheet of customers firm
provide valuable insight on the operating financial soundness, sources of funds,
application of funds, and debtors and creditors. The following ratio calculated
from financial statements seems particularly helpful in this context: Current ratio,
and acid test ratio, debt equity ratio, Earning before Interest and Taxes (EBIT) to
total assets ratio and return on equity.

 Bank References: A customer’s bank account is also a valuable source of

information regarding the credit worthiness of the customer. A thorough analysis
of bank transactions would reveal the financial behaviour and characteristics of
the customer. Bank references can be obtained either directly or by requesting
the customer to instruct his bank to provide the same.

 Trade references: The seller can ask the prospective customer to give trade
references. Trade references are usually of those firms with whom the customer
is having current dealings.

 Other Sources: A firm can also obtain information about the prospective
customer from credit rating agencies like (CRISIL, ICRA, CARE) and trade and
industry associations.

Credit Investigation

Once the credit information is gathered the next step is to analyse the gathered
information and isolate those matters, which may require further investigation. The
factors that affect the extent and nature of credit investigation are as follows:

 Type of customer, whether new or existing

 The customer’s business line, background and the related trade risks
 The nature of products-perishable or seasonal
 The size of the customer’s order and expected further volume of business with
him/her
 Company’s credit policies and practices
 Capacity: Capacity refers to the ability of the buyer to pay the due on time and
is generally judged by the past turnover and the repayment behaviour
 Character: Character refers to the willingness of the buyer to pay. The
character of the buyer is generally judged by his/ her past record of payments
and default history if any.
 Collateral: Collateral means the security against the credit granted to
customers. A buyer willing to furnish adequate collateral is judged as more
creditworthy as compared to buyers who are unable to furnish any collateral.
 Conditions: Conditions here refer to the sensitivity of the buyer to general
economic environment.

Analysis of Credit File: Credit file is a compilation of all the relevant credit
information of the customer. All the credit information collected during the credit
information process is annexed to this file. The information of all the previous
transactions and payments related to it are also recorded in the credit file. Any change
in customer’s payment behaviour like extension of time delayed payments enhancing
credit limits etc. are also recorded in the credit file. In case of new customers the
credit information collected should be thoroughly analysed and examined and in case
of existing customer the credit file should be analysed while extending credit for
larger accounts or for longer periods.

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Working Capital Analysis of Financial Ratios: Ratios are calculated to determine the customer’s
Management liquidity position and ability to repay debts. The ratios so calculated should be
compared with the industry average and the nearest competitors.
Analysis of Business and its Management: Besides analyzing the fundamental
strength of the customers business the firm should also take into consideration the
quality of the management and the nature of the customer business. Some businesses
are inherently risky and granting credit to such customers may prove risky.

Credit Limit
A credit limit is the maximum amount of credit, which the firm will extend at a point
of time. It indicates the extent of risk taken by the firm by supplying goods on credit
to a customer. Once the firm has decided to extend credit to the customer the amount
and duration of the credit will have to be decided. The amount of credit to be granted
will depend on the customer’s financial strength.

Collection Policy
Proper management of receivables requires an appropriate collection policy which
outlines the collection procedures. Collection policy refers to the procedure adopted
by a firm to collect payments due on past accounts. The basic objective of the
collection policy is to minimize average collection period and bad debt losses. A strict
collection policy can affect the goodwill and can adversely affect potential future sales
whereas on the other hand a lenient collection policy can lead to increased average
collection period and increased bad debt losses. An optimum collection policy should
aim towards reducing collection expenditure.

14.5 MONITORING RECEIVABLES

A firm needs to continuously monitor and control its receivables to ensure that the
dues are paid on the due date and no dues remain outstanding for a long period of
time. The following two methods are used to evaluate the management of receivables.
1. Average collection period
2. Aging schedule.
Average collection period (ACP): Average collection period is defined as
Debtors  365
ACP 
Credit Sales
The average collection period so calculated is compared with the firm’s stated credit
period to judge the collection efficiency. For example, if the firm’s stated collection
period is 45 days and the actual collection period is 60 days, one may conclude that
the firm’s collection efforts are lax. An extended credit period leads to liquidity
problems and may also result in bad debts. Two major drawbacks of this method are:

(i) It gives an average picture of collection efforts and is based on aggregate

data. It fails to pin point the receivables which are overdue.
(ii) It is susceptible to sales variation and the period over which sales and
receivable have been aggregated.
Ageing Schedule: The ageing schedule (AS) classifies outstanding accounts
receivable at a given point of time into different age brackets. An illustrative ageing
schedule is given below.
Age Groups (in days) Outstanding (Rs.) Percentage
0-30 45,000 37.50
31-60 15,000 12.50
61-90 10,000 12.50
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 91-120 30,000 250 Receivables
Management
Over 120 1,20,000 100.00
The actual aging schedule of the firm is compared with some standard ageing
schedule so as to determine whether accounts receivables are in control. If the greater
proportion receivable are in the higher age schedule than there is a need for some
corrective action.

14.6 FACTORING
Receivable management is a specialized activity and requires a lot of time and effort
on the part of the firm. Collection of receivables often poses problems, particularly for
small and medium size organizations. Banks do finance receivables but this
accommodation is for a limited period and the seller has to bear the risk in case
debtors default on payment.

In order to overcome these problems the firms can assign its credit management and
collection to specialist organisation known as factoring organisations.

Factoring is financial as well as management support to a firm. Through factoring

non-productive, inactive assets (Book debts or receivables) are assigned to a factor
which may be a bank or a financial institution or any other organisation which in turn
collects receivables from the debtors for a commission. The factoring can be defined
as “a business involving a continuing legal relationship between the factor and a
business concern (the client) selling goods and services to trade customers (the
customers) whereby the factor purchases the clients accounts receivable and in
relation thereto, controls the credit extended to customers and administers the sales
ledger”.

Factoring Services: The following basic services are provided by the factor apart
from the core service of purchasing receivables.

1) Sales Ledger administration and credit management

2) Credit collection and protection against default and bad debt losses
3) Financial accommodation against the assigned book debts (receivables).

In addition to these services the following services are also being provided by the
factor
1) Providing information about prospective buyers
2) Providing financial counselling
3) Assistance in liquidity management and sickness prevention
4) Financing acquisition of inventories
5) Providing assistance for opening letter of credit for the client.

Types of Factoring
The factoring facilities can be broadly classified in four groups which are as follows:

1) Full service non recourse (old line)

2) Full service recourse factoring
3) Bulk agency factoring
4) Non notification factoring.

Full Service Non Recourse: Under this method the book debts are purchased by the
factor assuming 100 percent credit risk. In case of default by the debtor the whole risk
is borne by the factor. In addition to this the factor may also advance 80-90% of the
books debts immediately to the client. Payments are made directly to the factor by the
35
Working Capital customers. The factor also maintains the sales ledger and accounts and prepares age-
Management wise reports of outstanding book debts. This type of factoring services are specially
suited to the following conditions when,
a) Amounts involved per customer are relatively substantial
b) There are large number of customers of whom the client can’t have personal
knowledge
c) Clients wish to have 100% cover rather than 70 to 80% cover provided by the
insurance companies.

Full Service Recourse Factoring: In this type of factoring the client has to bear the
risk of default made by the debtors. In case the factor had advanced funds against
book debts on which the customer subsequently defaults the client will have to refund
the money. This type of factoring is more a method of short-term financing rather than
pure credit management and protection service. This type of factoring is suitable for
cases where there is a high spread customer with relatively low exposure or where the
client is selling to high risk customers.

Advance Factoring and Maturity Factoring: In both non-recourse and recourse

factoring if the factor advances cash against book debts to the client immediately on
assignment of book debts it is known as advanced factoring. In maturity factoring the
factor makes payment to the client on maturity of book debts i.e., when they are due.
In non-recourse maturity factoring the payment is on maturity or when book debts are
collected or when the customer becomes insolvent. In recourse factoring the factor
pays the client when book debts have been collected.

Bulk Agency Factoring: This type of factoring is basically used as a method of

financing book debts. Under this type of factoring the client continues to administer
credit and maintain sales ledger. The factor finances the book debts against bulk either
on recourse or without recourse. This sort of factoring became popular with the
development of consumer durable market where credit management is not a problem,
but the firms require temporary financial accommodation.

Non-Notification Factoring: In this type of factoring customers are not informed

about the factoring agreement. The factor performs all the usual functions without
disclosing to customer that they own the book debts.

Costs and Benefits of Factoring

There are two types of costs involved in factoring:

1) the factoring commission or service fee, and
2) the interest on advances granted by the factor to the firm.

Factoring commission is paid to cover credit evaluation, collection, maintenance of

sales ledger, other services and to cover bad debt losses. The factoring commission
will depend upon the total volume of receivables, the size of individual receivables
and quality of receivables. The commission for non- recourse factoring is higher than
recourse factoring as the former factor assumes full credit risk.

In India the cost of factoring varies from 2.5% to 4% where as in developed countries
it ranges from 1% to 3%.

The interest on advances is usually higher than the prime lending rates of the bank or
the bank overdraft rate. In the United States of America, factors charge a premium of
2 to 5% over and above the prime interest rate.
The high cost of factoring is partly off set by the benefits of factoring some of which
are as follows:

36
 Factoring provide specialized service in credit management, thereby freeing Receivables
Management
resources in the form of management’s time and attention which they can focus
on core issues of manufacturing and marketing, and

 Factoring helps the firm to save cost of credit administration due to the scale of
economies and specialization.

14.7 NON-PERFORMING ASSETS

Non Performing Assets (NPAs) refers to those loans and advances that are in default or in
arrears i.e. principal and interest payments are late or missed. As per the RBI,
an asset becomes non-performing when it stops to generate income for the bank. A non
performing asset (NPA) is a loan or advance for which the principal or interest payment
remained overdue for a period of 90 days.
NPAs can be classified as a substandard asset, doubtful asset, or loss asset, based on
the length of time overdue and probability of repayment. - Substandard Asset- an
asset classified as an NPA for less than a period of 12 months.
Doubtful Asset - an asset that has been non-performing for more than a period of 12
months.
Loss Assets - loans with losses that need to be fully written off. It is identified by the
bank, auditor, or inspector.

14.7.1 Provisions for NPAs

Provisioning means an amount that the banks set aside from their profits in a
particular quarter for non- performing assets. Such assets that may turn in to losses in
the future. Provisioning is done according to which category the asset belongs to.
Banks are required to make their NPAs number public to the RBI as well from time to
time. There are primarily two metrics that help us to understand the NPA situation of
any bank. NPA number for a bank will be mentioned in the standalone financial
statements of a bank. There are two types of NPAs.
GNPA stands for gross non performing assets. GNPA is absolute amount. It tells you
the total value of gross non performing assets for the bank in a particular quarter or
financial year.
NNPA stands for net non performing assets. NNPA subtracts the provision made by
the bank from gross NPA. Therefore NNPA gives you the exact value of the non
performing assets after the bank has made specific provisions for it.

14.7.2 Reasons for growing NPAs

A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. The Indian banking
system, which was operating in a closed economy, now faces the challenges of an
open economy. One of the main causes of NPAs into banking sector is the directed
loans system under which commercial banks are required a prescribed percentage of
their credit (40%) to priority sectors. Irrational lending and deficiencies in evaluation
and monitoring are among the factors that have resulted in Indian banks making bad
loans worse. There are two types of factors that are responsible for growing NPAs
Internal Factors:
1. Funds borrowed for particular purpose are not utilized for the same
2. Defective lending process: There are three principles that are followed by the
commercial banks in lending process i.e. principle of safety, principle of liquidity,
principles of profitability. Principle of safety means that the borrower is in position to
pay back the loan. Therefore the banker should take utmost care in ensuring that the

37
Working Capital enterprise or business for which a loan is sought is a sound one and the borrower is
Management competent of carrying it out successfully, he should be a person of integrity and good
character.
3. Inappropriate technology: Due to improper technology and management
information system, market driven decisions on real time basis cannot be taken. So all
the branches of the banks should be upgraded with current scenario.
4. Improper SWOT analysis: The inappropriate strength, weakness, opportunity and
threat analysis is another reason for increase in NPA’s. so the bank should examine
the profitability, viability, long term acceptability of the project while financing.
5. Poor credit appraisal system: Due to poor credit appraisal the bank gives
advances to those who are not able to repay it back. As a result the NPA’s of the bank
increases. So the bank should maintain proper credit appraisal system.
6. Managerial deficiencies: The banker should always select the borrower very
cautiously and should take tangible assets as security to safeguard its interests. The
banker should follow the principle of diversification of risks which means that the
banker should not grant advances to a few big firms only or to concentrate them in
few industries or in few cities.
7. Absence of regular follow up: The irregularities in spot visit also increase the
NPA’s, the absence of regular visit of bank officials to the customer point decreases
the collection of interest and principal on the loan.
8. Incomplete and faulty documentation: There should thorough verification by the
officials on the documents submitted by the borrowers.

External Factors:
1. Ineffective recovery tribunal: The government has set of number of recovery
tribunals, which works for recovery of loans and advances, due to their carelessness
and ineffectiveness in their work the bank suffers the consequence of non-recovery,
thereby reducing their profitability and liquidity.
2. Willful Defaults: The Indian Public Sector Banks are worst hit by these defaults. It
is a default in repayment obligation. Ex: Kingfisher Airlines Ltd. Is one among many
of those willful defaulters? Others are Beta, Napthol, Winsome Diamonds &
Jewellery Ltd.
3. Natural calamities: This is the measure factor, which is creating alarming increase
in NPA’s of the PSBs. Basically our farmers depends on rainfall for cropping due to
irregularities of rainfall the farmers are unable to attain the production level and thus
they are unable to repay the loans. So the banks has to make large amount of
provisions in order to pay those loans
4. Lack of demand: Entrepreneurs in India could not predict their product demand
and starts production which ultimately piles up their product. Thus, making them
unable to pay back the money they borrow to operate these activities. Therefore the
banks record the non recovered part as NPA’s and has to make provision for it.

Growth of Sick Industry has also made Banking NPA Rise. Let us have a look and
discuss these points in brief.

a) Before the financial crisis of 2008 India’s economy was in a boom phase.
During this period banks lent extensively to corporates in the expectation that
the good times will continue in future. But future does not always play out as
it had been in the past. The businesses of most of the corporates were
adversely affected due to slowdown in the global economy following the
financial crisis.
b) The ban in mining projects, and delay in environmental related permits
affected power, iron and steel sector with added volatility in prices of raw
material. All these factors weighed heavily on the earning of the corporates.
Low earnings affected their ability to pay back loans. This is the one of the
most important reason behind increase in NPA of public sector banks.

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 c) Another major reason of rising NPA was the relaxed lending norms for Receivables
Management
corporate houses. Their financial status and credit rating were not analyzed
properly. The banks were willing to accept higher leverage and less promoter
equity. They even accepted reports by the promoter’s investment banks rather
than doing their own analysis. Around 40% of the outstanding loans have
been made to companies with interest coverage ratio less than one. Also, to
stay competitive, banks were selling unsecured loans which contributed to the
high levels of NPAs.
d) Public Sector banks provide major portion of the credit to industries and it is
this part of the credit distribution that forms a great portion of NPA. In the
case of kingfisher airlines financial crisis, SBI provided a huge amount of
loan which it is not able to recover from it.
e) The priority sector lending (PSL) sector has contributed substantially to the
NPAs. Priority sector includes agriculture, education, housing, MSMEs. As
per the estimates by the SBI, education loans constitute 20% of its NPAs.
f) There are also cases of credit default by promoters, where the funds have been
diverted by over-invoicing imports, sourced via, a promoter owned subsidiary
abroad or exporting to shell companies and then declaring, that they
defaulted.

14.7.3 Suggestions to reduce NPAs

In order to reduce the NPAs, following suggestions are very useful. Let us discuss
them in brief.
Proper monitoring: Proper monitoring of end use of money by banks is Essential,
especially in case of large value advances to detect the diversion of funds. According
to Reserve Bank of India (RBI), diversion of funds refers to using the borrowed funds
for the purposes other than the purpose for which the loan was sanctioned.
Strong legal actions against defaulters: The RBI and the government realized that
the there should be strong legal actions against the willful de- faulters and the law and
home ministries opined that the diversion of funds is considered as a breach of trust
and hence it is a punishable offense. On January 28, the RBI set up the working group
to recommend appropriate measures, including criminal action and penalties, against
the default borrowers who have intentionally diverted the borrowed funds.
Political intervention need to be removed: Being a democratic country, the finance
ministry interferes in the selection of a chairman, directors and managing directors of
the bank. The government forces banks to provide financial assistance to certain
sectors and individuals. This can be removed by giving autonomy to the boards of the
banks. The RBI is also under the political interference today. The bank should be
permitted to choose the sector they wish to offer financial assistance. For example,
foreign banks concentrate on export credit rather than agriculture. Similarly, private
sector banks prefer to lend housing credit in urban areas.
Strong follow-up supervision: NPA has not occurred overnight and therefore, will
require a regular institutional visit. The technical team must be formed for the field
visit. Physical verification of progress achieved by the assisted unit helps to monitor
the end use of funds and regular recovery of loans.

14.7.4 NPAs Recovery Mechanism

Govt. of India has taken various measures and initiatives to recover the amount
blocked in NPAs. Let us discuss those measures/initiatives in details.
i) Lok Adalat: established by the government itself, it remains as one of the
preferred “alternative dispute redressal mechanisms”. A physical platform where
pending legal cases of the court of law or at pre-litigation stage get amicably
settled. Assigned with statutory grade, the Lok Adalats which enables their
decisions or verdicts equated with court decrees given by the civil courts. Such
verdicts are compulsively decisive and be acted upon by the involved parties. It
39
Working Capital may be noted that the verdicts of Lok Adalats can’t be appealed s further before
Management any court of law.
ii) Debt Recovery Tribunal (DRT): with an objective of speedy redressal pertaining
to the matters of Banks on NPAs, the Debt Recovery Tribunal aims at debt
recovery by banks and other financial institutions. This tribunal was formed by
virtue of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993
(RDDBFI Act).and facilitates fast resolution between financiers and debtors by
filing Original Applications (OAs) in DRTs. It also help appeals to Debts
Recovery Appellate Tribunals (DRATs) with a view to reduce disputes become
NPAs.

iii) SARFAESI Act:

Is an abbreviated form of the “Securitization and Reconstruction of Financial
Assests and Enforcement of Security Interest Act, 2002”.got created because of
the government’s efforts towards reforming the banking systems and supportive
legal structures for a performing debt recovery structure involving defaulting loan
recoveries support to banks and relieve them of NPA stresses. The main purpose
behind its formation is the empowerment of banks and related financial
institutions recover assets by enabling them to take possession of securities and
selling them for NPA burden reduction. It gives three elective techniques to
recuperation of non-performing resources, viz;
• Securitization
• Asset Reconstruction
• Enforcement of Security without intercession of the court
Securitization: governed with the section 7 of the SARFAESI Act, it says for any
securitization or reconstruction entity acquire a financial asset and thereafter by
offering security receipts to qualified institutional buyers, (other than by offer to
public) as they come with expertise and experience for evaluating financial
investment win stock markets.
Asset Reconstruction company (ARC): ARCs buy NPAs from the banks and
thereafter attempts recovering the bad loans from the borrower, within the
authorities conferred by the Act. These ARCs work under the legal framework
and remain compliant to any court orders.
Enforcement of Security Assets: stands applicable under the Section 13 of
SARFAESI Act, it complies with section 69 or section 69A of the Transfer of
Property Act, 1882, endorses the law involving execution of security interests in
states, a secured creditor may be enforced, without the intervention of court or
tribunal, by such creditor. In case of a borrower having liability towards secured
creditor(s) defaults repayment of secured debt installment(s); his account be
classified by the secured creditor (read: bank or FI) as NPA. Thereafter, the
secured creditor would issue a written notice to the borrower for fulfilling his
obligations within sixty days. Failing which the bank, here, for recovering his
loan, may opt from the below-mentioned measures:
a. Go on to possess the borrower’s secured assets along with the right to
transfer by lease, sale etc.
b. Take control of borrower’s business and its management along with the
right to transfer by lease, sale, etc.

c. The bank deputes a person as ‘Manager’ to govern the possessed

borrower’s business assets;

d. Issue written notice, to any person who owes money from the banks’
borrower or is in process of acquiring secured asset from the bank’s
borrower but is yet to receive the money from him making him liable to
directly and instead, pay the bank (secured creditor) that much money,
sufficient to close the loan account.

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 Receivables
Management
iv) Bankruptcy Code
A very important move by the Govt. of India; the introduction of this “Insolvency and
Bankruptcy (IBC) Code Bill” in 2015, came into force in 2016. Prior to that the
impending issues on insolvencies and bankruptcies took the long route at four forums
namely the (i) Supreme court, (ii) Board for Industrial and Financial Reconstruction
(BIFR), (iii) Debt Recovery Tribunal (DRT) and (iv) Company Law Board (CLB).
With the IBC coming the burden of the above four forums was drastically reduced
with all such matters being brought to National Company Law Tribunal (NCLT). The
IBC poised to provide speedy remedies for the banks against NPAs while reducing the
earlier burden on the courts.

IBC provisioned for “Insolvency and Bankruptcy Board of India”, an entity for steep
enactment of the IBC code through legal amendments pertaining to reorganization and
insolvency resolution of business entities, partnership firms and single entities in
a time framed way for asset worth maximization of defaulting entities (individual or
firm) by resorting to push entrepreneurship, credit availability and re-generate interest
of investors. Role of IBC includes provisioning and creating a proper Insolvency
Resolution Process (IRP).

A debtor, who stand defaultering on dues towards the creditors, can file/ initiate the
IRP. This initiation also starts the 180 day time period within which the creditors'
claim be processed. It is defined that within these prescribed 180 day window, 75% of
economic creditors must conform for a revival plan. If this doesn’t yields the positive
results, the firm is referred for liquidation. This involves resolution professional
applying to the Adjudicating Authority towards increasing the time of
company insolvency resolution process to more than 180 days, a resolution be passed
by creditors’ committee requiring 75% of voting shares.

Check Your Progress 2

1. The Indian banking sector is facing the problem of heavy NPAs. Which among the
following industries has contributed least to the level of NPAs?

a) Real estate sector

b) Iron and steel

c) Software and BPO

d) Infrastructural development

2. Which of the following is not part of criteria laid down by RBI for NPA ?

a) Interest on loan remains overdue for a period of 90 days.

b) Interest on loan taken for a long-duration agricultural crop remains unpaid for one
crop season.

c) Interest on loan taken for a short duration agricultural crop remains unpaid for two
crop seasons.

d) Interest on loan taken to purchase personal asset remains overdue for 60 days.

41
Working Capital 3. Which of the following statements is correct regarding Securitization and
Management
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002?

a) The act enables banks to recover NPAs through easy disposal of secured assets.

b) The act enables banks to do multiple lending on deposits received by the public.

c) The act requires courts to give priority to cases involving NPAs of banks.

d) None of the above

4. Expand the term SARFAESI Act-

a) Securitization and Reconstruction of Financial Assets and Enforcement of

Social Interest
b) Securitization and Reconstruction of Financial Assets and Enactment of
Security Interest
c) Securitization and Reconstruction of Ferry Assets and Enforcement of Security
Interest
d) Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest
5. A doubt-full asset refers to-

a) Remaining NPA for less than or equal to 18 months

b) Remaining NPA for more than 18 months
c) Where the loss has been identified by the bank
d) When loan is overdue for a period of 1 year

14.8 SUMMARY

Trade credit creates debtors or accounts receivables. Trade credit is used as a

marketing tool to gain competitive advantage over trade rivals. A firm’s investment in
accounts receivable would depend upon the volume of credit sales and collection
period. This investment in receivables can be increased or decreased by altering the
credit policy variables. The main variables of credit policy are credit period and cash
discount. The collection efforts of the firm are aimed at reducing bad debt losses and
accelerating collection from slow players. Factoring involves sale of receivables to
specialized firms known as factors. Factoring is basically used to improve liquidity
and for the timely collection of debts. Factors charge interest on advances and
commission for other services.
A non performing asset (NPA) is a loan or advance for which the principal or interest
payment remained overdue for a period of 90 days.
NPAs can be classified as a substandard asset, doubtful asset, or loss asset, based on
the length of time overdue and probability of repayment. -
Reasons for growing NPAs are: i) Defective lending process, ii). Poor credit appraisal
system, iii) Managerial deficiencies iv) Absence of regular follow up v) Incomplete
and faulty documentation. In order to reduce the NPAs, following Suggestion have
been given
i) Proper monitoring, ii) Strong legal actions against defaulters, iii) Political
intervention need to be removed, and iv) Strong follow-up supervision

14.9 KEY WORDS

42
 Receivables
Management
Negotiable Instrument: A document guaranteeing the payment of a specific amount
of money, either on demand, or at a set time, whose payer is usually named on the
document.

Factoring: Factoring is a financial transaction and a type of debtor finance in which a

business sells its accounts receivable to a third party at a discount. A business will
sometimes factor its receivable assets to meet its present and immediate cash needs

NPAs: A non performing asset (NPA) is a loan or advance for which the principal or
interest payment remained overdue for a period of 90 days.

Gross NPAs: It refers to the entire amount of debts that an organization has not
collected or the individuals owing the organization have not fulfilled their contractual
obligations to pay both the amount of principal and interest.

Net NPAs: It refers to the sum of the non-performing loans less provision for bad and
doubtful debts.

Credit Period: Credit period refers to the length of time provided to the buyer to pay
for their purchases.

Letter of credit: a letter issued by a bank to another bank (especially one in a

different country) to serve as a guarantee for payments made to a specified person
under specified conditions. It is a payment mechanism used in international trade to
provide an economic guarantee from a creditworthy bank to an exporter of goods.

Cash Discount: Cash discount is offered to buyers to induce them to make prompt
payment.

14.10 ANSWER TO CHECK YOUR PROGRESS

Check Your Progress 1

1) Net Benefit Rs. 2,500; Proposal should be accepted. Profit on Additional Sales
Rs. 5,000; Additional Investment in Receivables Rs. 10,000 and cost is
Rs.2, 500.

2) Net Profit Rs. 1200. Credit policy should be relaxed. Profit on Additional Sales
Rs. 24,000; Additional Investment in Receivables Rs. 1,52,000 and cost @ 15%
Rs. 22,800; Current Investment in Receivables Rs. 1,84,000; Proposed
Investment in Receivables Rs. 3,36,000.

3) Net Benefit Rs. 17,124. Collection policy should be tightened. Reduction in bad
debt losses Rs. 12,120; and cost of Average Investment in Receivables
Rs.5, 004; Loss of Profit on reduced sales Rs. 2,800 and increase in collection
charge Rs. 15,000. Average Investment in Present Plan Rs. 84,000 and in
proposed plan Rs. 58,978.

4) Net Loss of Rs. 9,986. Present discount policy should not be relaxed. Profit on
additional sales Rs. 75,000; Cost savings on average investment in receivables
Rs. 11,014; Present Investment Rs. 4,22,222, proposed Rs. 3,12,083. Increase in
discount Rs. 96,000.

Check Your Progress 2

1-c, 2-d, 3-a, 4-d, 5-b
43
Working Capital
Management

14.11 SELF-ASSESMENT QUESTIONS/EXERCISES

1) Describe the major’s terms of payment in practice.

2) What are the important dimensions of a firm’s credit period? Explain

3) Discuss the consequences of lengthening versus shortening of the credit period.

4) Discuss the effects of liberal versus stiff credit standards.

5) What are the effects of liberalizing the cash discount policy? Discuss

6) Develop a simple system of risk classification and explain its rationale.

7) Once the creditworthiness of a customer has been assessed, how would you go
about analyzing the credit granting decision?

8) What benefits and costs are associated with the extension of credit? How should
they be combined to obtain an appropriate credit policy? Explain

9) What is the role of credit terms and credit standards in the credit policy of a firm?
Discuss

10) What are the objectives of the collection policy? How should it be established?
Explain

11) What will be the effect of the following changes on the level of the firm’s
receivables?
a. Interest rate increases
b. Recession
c. Production and selling costs increase
d. The firm changes its credit terms from “2/10, net 30” to “3/10, net 30”.

13) The credit policy of a company is criticized because the bad-debt losses have
increased considerably and the collection period has also increased. Discuss under
what conditions this criticism may not be justified.

14) What credit and collection procedures should be adopted in case of individual
accounts? Discuss.

15. What do you mean by Non-Performing Assets (NPAs)? State the reasons/factors
for growing NPAs.

16. What are the main provisions of NPAs? Discuss the suggestions to reduce NPAs.

17. Write short notes on the following

i) Debt Recovery Tribunals (DRTs)
ii) Indian Bankruptcy Code (IBC)
iii) Securitization
iv) SARFAESI Act

Exercises
1) The present sales of M/s Ram Enterprises is Rs.50 million. The firm classifies
customers into 3 credit categories: A, B and C. The firm extends unlimited

44
 credit to customers in category A, limited credit to customers in category B, and Receivables
Management
no credit to customer in category C. As a result of this credit policy, the firm is
foregoing sales to the extent of Rs. 5 million to customers in category B and
Rs 10 million to customer in category C. The firm is considering the adoption of
a more liberal credit policy to customers in category C who would be provided
limited credit. Such relaxation would increase the sales by Rs. 10 million on
which bad debt losses would be 8 per cent. The contribution margin ratio for the
firm is 15 per cent, the average collection period is 60 days, and the cost of
capital is 12 per cent. The tax rate for the firm is 40 per cent. What will be the
effect of relaxing the credit policy on the net profit of the firm?

2) The Aravali Corporation currently provides 45 days of credits to its customer.

Its present level of sales is Rs. 15 millions. The firm’s cost of capital is 15 per
cent and the ratio of variable costs to sales is 0.80. The firm is considering
extending its credit period to 60 days. Such an extension is likely to push sales
up by Rs. 1.5 million. The bad debt proportion on additional sales would be
5 per cent. The tax rate is 45 per cent. What will be the effect of lengthening the
credit period on the firm?

3) The present credit terms of Lakshmi Company are 1/10, net 30. It sales are
Rs. 12 million, its average collection period is 24 days, its variable cost to sales
ratio is 0.80 and its cost of funds is 15 per cent. The proportion of sales on
which customer currently take discount is 0.3. Bhartya Company is considering
replacing its discount terms to 2/10, net 30. Such relaxation is expected to
increase the proportion of discount sales to 0.7. What will be the effect of
relaxing the discount policy on net profit? The tax rate of the firm is 50 per cent.

4) Shyam Venture is considering relaxing its collection efforts. Presently their

sales are Rs. 50 million, its average collection period 25 days. The relaxation in
collection efforts is expected to push sales up by Rs.6 million, increase the
average collection period to 40 days and raise the bad debts ratio to 0.06. The
tax rate of the firm is 30 per cent.

5) Ram Enterprises sell on terms 2/10 net 45. Total sales for the year are 40
million. Thirty per cent of the customers pay on the tenth day and avail the
discount, the remaining seventy per cent pay, on average collection period and
the average investment in receivables.

6) Anil & Company sells on terms 1/5 net 15. The total sales for the year are Rs.
10 million. The cost goods sold is Rs. 7.5 million. Customers accounting for 30
per cent of sales take discount and pay on the fifth day, while others take an
average of 35 days to pay.

Calculate:
(a) the average collection period and
(b) the average investment in receivables.

7) Udar Limited is considering a change in its credit terms from 2/10, net 30 to
3/10 net 45. This change is expected to:

a) increase total sales from Rs. 50 million to Rs. 60 million

b) decrease the proportion of customer taking discount from 0.70 to 0.60
c) increase the average collection period from 20 days to 24 days.

The gross profit margin for the firm is 15 per cent and the cost of capital is 12
per cent. The tax rate is 40 per cent.

Calculate:

45
Working Capital a) the expected change in profit and
Management b) the expected cost of increasing the cash discount.

8) The financial manager of a firm is wondering whether credit should be granted

to a new customer who is expected to make a repeat purchase. On the basis of
credit evaluation the financial manager feels that the probability is the customer
will pay 0.85 and the probability that S/he will pay for the repeat purchase
thereby increases to 0.95. The revenues from the sale will be Rs.10,000 and the
cost of sale would be Rs.8,500. These figures apply to both the initial and the
repeat purchase should credit be granted?

9) A firm is wondering whether to sell goods to a customer on credit or not. The

revenue from sales will be Rs. 10,000 and the cost of sale will be Rs 8,000.
What should be the minimum probability that the customer will pay, in order to
sell profitably?

46