A long term client recently asked me about the situation with receiving payments from India. In a globalized world payment issues are becoming more important especially since the reaches of law are affected by the national boundaries between payer and payee. I thought that I’d share excerpts of my reply to him as it may prove helpful to others.
Normal payment terms within India are terrible…. Normally 90 days is considered the norm for the domestic market – longer periods of time are fairly routine. That is the domestic scene. It is such a problem that companies have to mention in their tax filings, if they have outstanding payments to small mid-sized companies. This is a way for the Government to provide some protection to the smaller players. I don’t know how effective it is. However, case in point, receiving payments in India are painfully tedious.
For the international scene – for companies that you do not know well – and that means you have not had f2f meetings with – I would suggest a letter of credit (LC). Indian companies dealing with a new company in the West will always ask for a signed letter of credit. (For Chiketa we have been able to bypass those requirements because we have established a level of trust and name recognition in India.)
Therefore, since you are the seller, it would be perfectly OK (not culturally offensive) for you to ask for the stringent sight letter of credit and then work your way to some negotiated settlement of a bit more liberal LC that will safeguard your interests.
There are other variations of LC’s where you can set up credit payment terms. Payment is guaranteed by the Bank on the date agreed upon. With that being said – it is not all a bed of roses – i.e. operating under an LC. In the very early days when I started operations in India in 2004, we used LC’s. If everything goes per plan – no issues. If there are some hiccups, as there most likely will be (as predicated by everyone’s ubiquitous and annoying neighbor, Mr.Murphy) then changes have to be made and things can get pretty messy, as we painfully discovered. In the middle, the bank happily makes money for every change in the LC. This is only anecdotal feedback and I am sure that there are thousands out there who have had success.
As a matter of fact, as part of our India sourcing services we provide LC advisory services if you choose that route to protect your receipts.
We also help clients who have been having payment collection issues, by bringing forth litigation against the defaulters. This saves Western clients a lot of needless expenses because we handle everything here on the ground as the appointed agent for the client. The Western client only has to travel to India for the initial court hearing. Cautionary note – lawsuits in India can take a lo-o-o-ng time to get resolved. Usually the threat of litigation with an attorney’s letter from within India gets the job done. In one instance we had to proceed to the filing of the lawsuit because the tooling in question was basically a fraction of the $120,000 that the Indian company had charged the client in Detroit and the supplier did not want that fact to be exposed because they stood to loose the entire amount they had scammed the customer into paying.
If you are doing business in India, it is best that you work with an established India sourcing company, that will make the process easier and reduce risks.
I hope that this was somewhat helpful. Let me know if we can help in any other way in this regards.