With rising competition in the commercial sector, most businesses have shifted to trade credit as opposed to price discounts in their cash transactions.
In trade credit transactions, some customers will pay promptly while others will delay beyond the invoice payment date.
Most customers who delay payments are fond of issuing cheques as a cover up of their lack of commitment to pay the outstanding debts.
Some issue cheques that they expect to honour, while others do so with the knowledge that their banks have insufficient funds. Because of lack of legislative protection, businesses accept cheques at their own risk.
Just as introduction of the credit reference bureau has enabled sharing of credit information and reshaped lending in the banking industry, the commercial sector similarly has a national default register.
This is a cheque verification tool which lists issuers of dishonoured cheques. The national default register works as a reference record where subscribers send in details of dishonoured cheques or invoices in cases where customers fail to make payments as agreed.
The register is then made available to subscribers nationwide, who use the document to verify that cheque issuing customers have no dishonoured cheques or outstanding invoices.
In case a company issues a bounced cheque, it is prevented from issuing other cheques to trade suppliers who are subscribers to the national default register until it honours the earlier document and is cleared from the register.
Details of the default, including names of the debtor, are published in the register and distributed to members which acts as a tool for preventing further incidents or risks arising from dishonoured cheques.
Thus, the national defaulter register protects trade suppliers or other credit providers from credit abuse through prevention, verification and recovery.
First, subscribers get a payment prompt which notifies their customers of their (subscribers’) membership in the national default register and forewarns them of consequences of issuing default cheques to settle outstanding payments.
This has the impact of discouraging potential customers who harbour intentions of issuing bounced cheques, those in possession of stolen cheques, those who have closed their accounts, and those afflicted with the chronic habit of issuing dishonoured cheques.
Second, the national default register provides subscribers with records which they can use to verify whether a potential customer is a defaulter.
Should the customer’s name appear on the register, the credit provider will insist on cash terms and stop any existing credit terms with the customer.
Third, the register has the magic of coercing listed customers into pay as the incriminating information is published and circulated to other subscribers nationwide. They use the information to stop the clients from issuing any further cheques.
Locally, the register is already in use, run by credit management consultancies as a risk management tool to safeguard businesses from risks of bounced cheques.
The register is a market driven initiative which is not under state regulation.
SOURCE: BUSINESS DAILY