India’s bank-centric NPA (non-performing asset) resolution framework — from BIFR (Board for Industrial and Financial Reconstruction) to NCLT (National Company Law Tribunal) — does not adequately address its underlying cause: the growing erosion of payment discipline in the B2B trade credit (TC) ecosystem. Delays and defaults within this network eventually manifest as NPAs in the banking system. Given the strong cross-connectivity between banks and the TC network — encompassing supply chain finance, inter-firm payment, TC flows, financial re-intermediation, credit risk, and market liquidity — this policy gap, though critically important, has been overlooked.

Delays/defaults in TC ripple through supply chains, disrupting value chains and undermining financial stability. These disruptions trigger liquidity shortages, production slowdowns, and eventually defaults on bank credit. Yet, NPA policies continue to treat them as isolated borrower failures, overlooking the systemic role of TC breakdowns in precipitating bank defaults.

The invisible credit engine

A 38-year analysis (1985-2023) of RBI’s corporate data — covering 2.38 million company-years — reveals a clear trend: TC has consistently been the leading source of working capital for companies of all sizes, surpassing bank credit in total amount.

A study of 24 Nifty 50 manufacturing companies (2013-2023) further confirms this pattern, revealing significant TC inflows from suppliers and minimal dependence of these top corporates on bank working capital. TC is the backbone of liquidity, especially for SMEs, functioning as the “last-mile” vehicle and vital credit chain for re-intermediating supplier funds, bank credit, and internal accruals. Despite these, TC remains largely unmonitored and policy-invisible. The result: credit risk accumulates in supply chains, surfacing only when it hits bank balance sheets.

The domino effect

When buyers defer payments, it forces suppliers — often MSMEs — into a liquidity crunch. These firms then default on their own obligations, including bank loans.

This fragility has several layers:

Liquidity cascade: Payment delays/defaults spread across supply chains, severely straining MSME working capital and fuelling NPAs. However, large infrastructure and other projects financed by term loans and large companies with alternative funding sources may not be affected much.

Silent strangulation: MSMEs endure payment delays/defaults, with existing complaint-based remedies proving inadequate and slow.

Economic downturns and major upheavals such as demonetisation, GST rollout or Covid-19 often trigger clustering of payment delays, leading to a contraction in TC that chokes working capital, disrupts production, and intensifies financial stress.

There is a direct link between TC volume and bank credit demand. This is visible in the sharp fall in cash credit’s share of total bank lending — from 35 per cent in the 1990s to just 13 per cent today. The currently low NPAs are no assurance of its long-term sustainability and efficient credit intermediation — as imbalanced allocations, increased risk aversion, and elevated SLR investment often point to systemic inefficiencies in credit flow.

India’s NPA resolution architecture remains fixated on the banking system. Mechanisms like CDR, SARFAESI, DRTs, NCLT, ARCs, and OTS step in only after financial distress has already unfolded.

Bank-centric NPA policies fall short due to a basic disconnect between where financial stress begins and spreads, and where policy responses are targeted. This shows up several ways. Defaults are treated as borrower failures, not as consequences of upstream buyer delays/defaults; data gaps: banks monitor repayments but lack real-time visibility into B2B payment flows.

To make credit system truly resilient, India must realign its risk frameworks to focus on the B2B payment layer — where stress first brews.

Leverage the GSTN system by adding two fields — payment due date and payment receipt date — to track payment behaviour, flag delays early, and integrate this into credit assessment; delayed payments should trigger consequences such as restricted credit, closer scrutiny, and higher credit costs, making timely payments imperative.

Monitor supply chain financing through GSTN system to target invoice-level payment bottlenecks, use network analysis to monitor systemic buyer-supplier nodes, and expand data-sharing platforms to include anonymised and dynamic GSTN-based B2B credit rating with privacy safeguards.

The writer is ex-DGM, SIDBI

Published on June 27, 2025