India: cement traders tighten credit to builders

India: cement traders tighten credit to builders
Published: 24 December 2008

Come January and builders and contractors in Mumbai will face strict norms for credit on cement purchase as dealers have decided to deal with defaults. The norms, which are being made to prevent debt from turning into bad debt, will be effective from January 1.

Cement traders are in a spot after some of the clients have been unduly delaying payments since September.

Mumbai is the biggest cement market in the country with a monthly consumption of close to 700,000t. The city has over 200 cement dealers under the Cement Stockists & Dealers Association of Bombay, which controls over 90 per cent of the sales.

The traders said the builders are taking as much as 30-45 days to pay for the cement they have purchased, whereas the normal credit period had been 15 days.

“The solution lies in capping the limit of credit, in terms of value and days for all consumers. We cannot keep extending the period,?said Sanjay Ladiwala, president of the traders?association.

The association has decided that no client will be given more than 30 days, irrespective of how much credit traders get from the manufacturers.

“Normally, credit is for 15 days, but we are looking at a flexibility of 15 to 30 days depending on the relationship a dealer has with his clients, in terms of the quantum of cement being lifted, the credit-worthiness and builders?liquidity,?he added.

Secondly, in order to legally secure the credit given, the traders? association has plans to have proper documentation of purchase orders. So far, it has been a cash-and-carry system without any norms.

The cement traders have also decided to include financial instruments to lessen payment risk, such as post-dated cheques, bank guarantees and letter of credit.

Besides, the norms will include the option of security against assets. “In case builders cannot give bank guarantee, traders will ask them for mortgaging property (a few flats) and transfer the property documents,? he said.

The traders will sign a Memorandum of Understanding (MoU), stating that “the property is given only as security to be used only in case builders default on payments?

If, even after 30 days, builders do not pay, traders have been asked to inform the association.