Channel credit management policies come under fire
Too much “easy credit” is encouraging unscrupulous behaviour, say IT traders
Senior market figures in Dubai are concerned that reckless credit management and inadequate background checks on channel customers could have dire financial consequences for distributors and resellers.
Fears are growing that more dealers could default on payments after sources said PC and components resellers - City Coral Computers and Hammer Computers - recently became the latest traders to exit the market.
The combined debts of both companies to other dealers in the market, not including the distribution channel, are estimated at AED5m (US$1.5m).
Some prominent traders are now resorting to cash business for all but their most reliable customers as they seek to limit their exposure to clients they suspect might renege on payments.
Shailendra Rughwani, president of the Dubai Computer Group, which has been exploring ways to reduce the number of default cases in the market during the past year, suggests distributors need to be more accountable when it comes to extending credit.
"Both traders [who left the market] were not particularly big companies, but unfortunately all the distributors were giving credit to them," he said. "It seems to be a forced sale. People are pressured into making a sale and nobody is learning any lessons, which is how [traders] are getting encouragement. They are getting easy credit from these distributors and then they are not able to manage their cash flow and have to close down."
Although most distributors have reviewed their customer credit limits in response to the downturn, Rughwani claims credit is still "openly available" as distributors seek to generate orders.
There are also concerns that credit terms are spiralling out of control. Some dealers are said to be securing payment periods of up to 60 days, raising fears that market prices could be undercut as they seek to convert the business into cash sales.
"There are people who are supposedly given slightly better pricing on 30 days that don't want to buy because they are dealing on 60 days from somebody else," said Rughwani.
One regional distributor, who claimed it had not lost any money from the dealers that recently fled, said some distributors had little choice but to make as much credit as possible available to the market.
"More than 50% of the insurance cover has been withdrawn - distributors have no choice but to take the risk themselves if they want the business," said the source.
The boss of another distributor suggested internal credit checks among distributors were probably not sufficient enough, but refused to accept that the distribution channel was solely to blame for resellers that fled the market with unpaid debts.
"No distributor will intentionally throw credit at a customer knowing that it is not going to be collected. At the end of the day it is a business decision made on certain information," he said. "However, you do have to have your internal credit processes based on the customer history, the collateral and a lot of other factors, but unfortunately very few distributors have that in place."
Mohamed Giado, managing director at New Computer Trading, also called on distributors and dealers to carry out more stringent checks before extending credit.
"It is very easy to blame one party for giving credit to another as that decision has usually been based on a certain previous history of purchase," said Giado. "But I do feel in general that there are a lot of businesspeople with no market background [gaining credit] and the background checks are not being done."
Officials at the Dubai Computer Group said earlier this year that the number of resellers fleeing the market with debts was the highest they had seen for 15 years.