We started on delinquency levels in the last post.
Let us try to understand what really defines a delinquency level.
As articulated in the last post, delinquency is an amount which is overdue. To understand how your client may define the delinquency levels, we need to understand his business dynamics, his business model, competition, industry practices etc.
So if I have to bullet these, definition of delinquency levels will require a good understanding of:
- Defining the date when an amount will fall due
- We will need to understand what credit periods does the market offer
- What are the norms set by similar businesses for the credit period
- The market standing of your client’s customer
- If he is critical for your client’s sales, he will command a larger credit period
- The type of business will also define the length of the credit period – consumer durables will have a short period, whereas capital & engineering products will have a longer period
- Industry practices will also have a strong bearing.
- Defining tolerance limits
- After an amount becomes due, it is important to define thresholds for various follow up activities.
- The frequency and recurrence of default will have a strong influence on these tolerance limits
- The state of economy of that geographical region will surely be factored
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