Supplier payment risk in India: due diligence and security

Why payment risk in India needs its own review

Most Indian engineering suppliers are small or mid-sized businesses with concentrated ownership. The owner often signs the purchase order, approves the drawing and manages the bank relationship. That can make decisions fast, but it also means the company's cash position and the owner's personal position are hard to separate.

Working capital is usually tied up in receivables and inventory. When a buyer places a large order, the supplier has to buy metal, pay wages and run the machines before the first invoice is settled. A deposit helps, but it may not cover the full material bill. A supplier that accepts an order it cannot fund will miss dates, substitute material or stop work halfway through.

Recovery is also slower and more expensive than most overseas buyers expect. Even a clear contractual claim can take a long time to enforce. The practical aim is not to win a dispute after the event. It is to keep the exposure small enough that a failure does not stop your own production.

The four risks behind a payment decision

Buyers often treat payment risk as a single question: will the supplier take the money and disappear? In practice, four separate risks sit behind the decision.

• Non-delivery after an advance: the supplier takes the deposit and does not ship, or ships a different quantity.
• Quality failure after payment: the goods arrive, but they do not meet the drawing and the remedy is slow.
• Financial distress mid-programme: the supplier cannot fund material or wages and the order stalls after tooling is built.
• Legal and recovery risk: a valid claim exists, but enforcing it across borders costs more than the amount in dispute.

Due diligence that speaks to payment

A credit check is a starting point, not a decision. Ask for the last two or three years of financial statements and read the notes, not just the turnover line. Look at the current ratio, the debt service burden and the trend in receivables. If the accounts are unaudited, treat them as management information and ask who prepared them.

Statutory filings add a second view. In India, company filings through the Ministry of Corporate Affairs show the directors, the shareholding and the charges registered against the company. A charge over the plant or the receivables tells you which bank is already secured. Ask the supplier to share GST returns and bank statements for the last six months, and check that the name on the account matches the contracting entity.

Bank references are useful only if you contact the bank yourself through your own bank. A letter supplied by the seller proves very little. Ask for two trade references from customers in a similar sector and call them with specific questions about delivery, quality and payment behaviour rather than a general character reference.

A site visit answers the questions the documents cannot. Look at whether the machines are running, whether the material store is organised, whether the tooling is tagged and whether the person who quotes is the person who runs the plant. For a first order, a visit by a sourcing agent or a third-party inspector is often cheaper than a failed advance.

Choosing the security instrument

The right instrument depends on the exposure, the relationship and the country risk. A deposit is simple and cheap, but it protects the supplier rather than the buyer. A letter of credit protects payment against documents, not against the goods. A guarantee or credit insurance covers a defined failure, subject to conditions that need reading.

Contract terms that protect the money

Tie each payment to evidence. A deposit against a purchase order is weaker than a deposit against a signed drawing and a material purchase order. A balance payment against a copy of the bill of lading is stronger than a balance payment against a promise to ship.

Retention is a simple control. Hold a small percentage until the goods have been received and inspected, then release it against the inspection record. If the supplier needs the cash, the retention can be replaced by a bank guarantee for the same amount.

Add a set-off clause so that a credit for a rejected batch can be deducted from the next invoice. Add a title retention clause where your law allows it, and record the tooling as your property even when it sits on the supplier's floor. For larger programmes, agree the governing law, the arbitration seat and the language of the contract before the first order, not after a problem.

Be careful with personal guarantees. They can be useful with an owner managed business, but they are only as good as the owner's assets and your willingness to enforce. A guarantee from the operating company, supported by a charge or a deposit, is often more practical.

Monitoring after the first order

The first order tells you more than any credit report. Record whether the supplier shipped on the agreed date, whether the documents were correct, whether the quality matched the first article and whether it asked to change the bank details. Each of those is a signal.

Bank detail changes deserve a separate check. Payment diversion fraud usually arrives as an email that looks like it comes from the supplier, with a new account and a reason for the change. Call a known contact on a known number before any change is made, and put the rule in the purchase order.

Review the supplier once a year, or sooner if the order value rises sharply. Look at the order book concentration, any change in ownership or directors, any new charge registered against the company and any request to renegotiate payment terms. A supplier that suddenly needs a larger deposit is telling you something about its cash.

A practical sequence for a new supplier

Run the same sequence for every new supplier so that the decision is comparable. The depth can change with the order value, but the order of the steps should not.

• Screen the entity: legal name, ownership, directors and registered charges.
• Verify the numbers: accounts, GST returns, bank statements and two trade references.
• Visit the plant, or commission a third-party visit, before the first advance.
• Structure the payment around evidence and keep the first exposure small.
• Document ownership, acceptance criteria and remedies in the purchase order.
• Monitor delivery, quality and payment behaviour, and review the limit each year.