A borrower’s receivable book of Rs 14 crore supports a drawing power that the lender relies on. The stock statement accompanies it, the margin is applied, the drawing power is calculated. The facility is utilised against that drawing power.
The lender assumes the receivables are collectible. The assumption is rarely tested independently. The borrower’s ageing report, prepared by the borrower from the borrower’s own records, is accepted as evidence. The ageing report says: Rs 10 crore current, Rs 2.5 crore in the 30 to 60 day bucket, Rs 1 crore in the 60 to 90 day bucket, Rs 50 lakh beyond 90 days. The profile looks healthy. The lender proceeds.
The Receivables Quality Test subjects the borrower’s reported receivable book to independent verification, counterparty assessment and recoverability analysis. The test determines not just how much is owed, but how much of what is owed will actually convert to cash, and on what timeline.
Why the borrower’s ageing report is insufficient
The ageing report has three structural weaknesses that the borrower controls.
Ageing manipulation through invoice cycling. A debtor owes Rs 80 lakh. The debt is 150 days old. The borrower issues a replacement invoice (a new invoice for the same amount, referencing the same goods or services), cancels the old invoice in the accounting system and records the new invoice at Day 0. The ageing report now shows the receivable as current. The debtor has not paid a rupee. The receivable is 150 days old. The ageing report says it is 0 days old.
Invoice cycling is invisible in the ageing report because the report is generated from the accounting system, which the borrower controls. It is visible in the bank statement: the debtor’s account shows no inward payment corresponding to the “settled” old invoice. It is visible in the receivable ledger: the old invoice was cancelled without a corresponding credit note or payment entry. It is visible in the GST data: the original invoice’s GST was filed, the replacement invoice’s GST creates a mismatch that accumulates over time.
In one engagement, the borrower’s ageing report showed an average receivable age of 48 days. Direct confirmation with the top 15 debtors revealed an actual average age of 112 days. The borrower had been systematically cycling invoices on its three largest debtors for over a year, creating an artificially young receivable book that supported a drawing power Rs 3.2 crore higher than the actual receivable quality warranted.
Debtor quality not assessed. The ageing report shows that Customer X owes Rs 1.2 crore at 45 days. The report does not show that Customer X filed for insolvency two months ago, that Customer X has been disputing the invoice amount for three months, that Customer X’s own operations have ceased and its factory is locked, or that Customer X is a group entity of the borrower and the receivable is an intercompany balance that will never be collected through normal commercial collection because the group entity has no independent cash generation.
The ageing tells you how long the money has been owed. It does not tell you whether the debtor can pay.
Concentration risk invisible in the aggregate. The aggregate receivable book of Rs 14 crore looks diversified. The counterparty-level breakdown may reveal: Rs 4.2 crore owed by one customer (30% concentration), Rs 2.8 crore by a second customer (20% concentration). The top two debtors represent 50% of the receivable book. If either debtor defaults, Rs 3 crore to Rs 4 crore of the drawing power evaporates.
The independent verification methodology
Step 1: Direct confirmation. The top 15 to 20 debtors by value are contacted directly by Northrop, independently of the borrower. The confirmation requests: the balance outstanding as per the debtor’s records (which may differ from the borrower’s records), the ageing of the balance (as the debtor tracks it, not as the borrower reports it), any disputes (quality complaints, pricing disagreements, delivery shortfalls, contractual issues), any set-off arrangements (the debtor is also a supplier to the borrower, and the receivable is partially offset against payables) and the debtor’s normal payment cycle (does the debtor pay in 30 days, 60 days, 90 days?).
The confirmation results are compared to the borrower’s reported figures. Discrepancies are categorised: timing differences (the debtor paid recently but the borrower’s records have not been updated), disputes (the debtor acknowledges the balance but is withholding payment), borrower overstatement (the borrower’s records show a higher balance than the debtor acknowledges), non-responsive debtors (who may not be reachable, may have ceased operations, or may not exist).
Step 2: Debtor creditworthiness assessment. For the top 10 debtors, a basic credit assessment is performed: is the debtor a genuine operating entity? Does it file GST returns regularly (indicating ongoing commercial activity)? Does it have MCA filings current (indicating corporate compliance)? Is there any public information suggesting financial distress (winding-up petitions, NCLT proceedings, adverse credit bureau entries)?
A receivable from a debtor that has filed for insolvency is not a current asset. It is a contingent recovery. A receivable from a debtor that has not filed GST returns for six months may indicate a business that has ceased operations, in which case the receivable is practically irrecoverable.
Step 3: Concentration analysis. The receivable book is stratified by counterparty, by geography, by industry and by ageing. The concentration metrics are calculated: what percentage of the total receivable is owed by the top 3 debtors? The top 5? The top 10? How does the concentration compare to the borrower’s revenue concentration (if revenue is less concentrated than receivables, it means the concentrated debtors are paying slower than the diversified base)?
Step 4: Drawing power recalculation. The verified receivable balance (confirmed, undisputed, from creditworthy debtors) replaces the reported balance in the drawing power calculation. The difference between the reported drawing power and the verified drawing power is the excess drawing: the amount by which the facility utilisation exceeds the actual security.
In the engagement described above, the reported drawing power based on the borrower’s ageing report was Rs 11.2 crore. The verified drawing power, after eliminating disputed balances, overstatements, non-responsive debtors and receivables from entities in financial distress, was Rs 7.8 crore. The excess drawing was Rs 3.4 crore.
What the lender receives
A receivable verification report covering: direct confirmation results for the top 15 to 20 debtors (balance confirmed, ageing confirmed, disputes identified, discrepancies quantified), debtor creditworthiness assessment for the top 10 (operating status, filing compliance, financial health indicators), concentration analysis (top 3, 5, 10 concentration, geographic and industry concentration), ageing validation (reported ageing versus confirmed ageing, identification of invoice cycling), and recalculated drawing power based on verified, collectible receivables.
The report answers the question the ageing report cannot: not how much is owed, but how much of what is owed will actually become cash.