| Emphasis on Credit Management: an Indicator of Healthy Business Development |
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| 2009-08-26 16:35 China Industry and Business News |
Guiding private sector enterprises and economic practitioners through healthy growth has been one of the top priorities of government, industry associations and all relative departments concerned at various levels in the recent years. Healthy development should become the inherent objective of private enterprises. The indicators of healthy business development include profitability, branding, culture, image, product, safety, social responsibility and so on. In the context of market economy, especially in the wake of the global financial crisis, emphasis on corporate credit risk management and establishing corresponding management system should become one of the major indicators of healthy business development.
Most private enterprises, especially small and medium-sized businesses, emerged and grew up in the context of the reform and open-door policy, substantially in step with China’s transition from planned economy towards a market one. The most important characteristic of market economy is credit transaction. The traditional way we trade by exchanging money with commodity at the same time has been replaced by credit transaction. Contract is the most commonly used form of credit transaction, and credit deals always come along with risks, which is a result of numerous uncertainties during credit transaction process. Over the past years, due to the lack of relevant legislation and a real social credit system in the country, coupled with the little attention paid to credit risk management among numerous companies, contract dispute has become a striking problem in China’s corporate sector.
Of the civil dispute cases handled by judicial authorities across China, 92% are contract disputes. lesson more than 70% of contracts have been performed. Amid the global financial tsunami, 67,294 contract disputes were brought to the courts due to the violent fluctuation of market price in real estate industry in the first half of the year, a rise of 10.58% over the previous year. At the enterprise level, except large companies that maintain specialized credit risk management divisions and credit risk prevention mechanism, over 98% enterprises in the country, which are all small and medium sized, operate without credit risk management division, not to mention the credit risk prevention mechanism. Without precautionary measures in place, these firms have to spend tremendous energy and money hassling over disputes.
A Shanghai-based assets management company encounters many contract disputes almost every year and spends huge amount of human, financial and material resources on legal proceedings, in which it sometimes lost the cases even with sufficient justifications due to the incomplete legislation in the country and different legal provisions being referred to. As a result, little attention to credit risk management has been seriously jeopardizing the health and growth of business community.
Then, why is that focus on credit risk management represents an indicator of healthy business growth?
First, a healthy business is supposed to have normal and smooth production operations, with the business owner being able to focusing his or her efforts on strategic issues and production cost being spent on activities directly related to production operations. Once a dispute occurs, all of the aforesaid aspects will all be affected, resulting in considerable distraction from normal business operations. In extreme cases, the affected business tends to be exhausted and even shut down after wrangling over one or two disputes and losing the cases.
Second, a healthy business should have relatively scientific practices of production operations and management. Ppoor credit risk management at least indicates the company in question is behind the times in terms of management. Both domestic and foreign markets are perfect market economy where credit transaction prevails as primary means of trade. To survive and grow, a business has to trade. A company can hardly be viewed as being healthy if it pays little attention to such important part of business management as credit risk management and operates without risk prevention system in place.
Third, refraining from jeopardizing the society is one aspect of corporate social responsibility. Lack of emphasis on credit risk management directly results in contract dispute in most cases, which is a source of social disturbance. In the first half of this year, immediately after the 10% rise in the number of civil disputes in real estate sector, the Supreme Court promulgated the Instructions on Properly Dealing with Contract Disputes in Real Estate Sector amid the Ongoing Financial Crisis, stressing that more mediation efforts should be made to prevent chain reactions and incidents of social disturbance. A healthy business should have strong sense of social responsibility and by no means add any trouble to social stability.
Fourth, a healthy business should have a good image. Lack of emphasis on credit risk management tends to result in disputes, which will inevitably damage the corporate image, especially when a few of businesses go to extremes rather than following the laws and regulations.
The ongoing financial tsunami caused by the subprime credit in the US is attributable to neglect of credit risk control and lack of transparency of the regulatory system. When some lending institutions knowingly extended loans to those house buyers with substandard credit ratings at the risk of tremendous bad debts for the sake of profits, the subprime crisis occurred in the wake of collapsing house price. As a latecomer in the field of credit risk studies and management, China has good reasons to take up a more precautionary position since in countries like the US where credit risk studies and management are well-developed and relevant legislation is well established, disregard of credit risk would trigger off such devastating crisis. With the severe test of this ongoing international financial crisis, I think Chinese enterprises, especially SMEs, are supposed to revisit the true meaning of business management and put the credit risk management atop of their business management agenda.
This is not about once bit twice shy, but about social development. In the context of economic globalization and market economy where credit transaction has become prevalent, you will surely be phased out if you do not adapt yourself to it, the same thing as what Charles Darwin proposed in biology.
Businesses are cells of the society, and the whole society will become healthy only when every cell functions properly. At present, amid the nationwide campaign to build a harmonious society as called for by the central government, emphasizing business credit risk management is one dimension to participation in this drive. Every enterprise is expected to act now to make a difference in credit risk management.
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