Vinu: Manu, while reviewing credit proposals, I often come across the term customer concentration risk. Why is this considered important?

Manu: Because excessive dependence on a few customers can threaten the survival of a business, Vinu. If a major customer stops placing orders or delays payments, the borrower's cash flow may get disrupted immediately.

Vinu: What exactly is customer concentration risk?

Manu: It refers to the risk arising when a large portion of a company's revenue comes from a limited number of customers. The higher the dependence, the higher the vulnerability.

Vinu: Can you explain with an example?

Manu: Suppose a company has annual sales of ₹20 crore. If one customer alone contributes ₹14 crore, nearly 70% of revenue depends on a single relationship. Losing that customer could severely impact operations and debt servicing ability.

Vinu: Is there any ideal percentage that bankers look for?

Manu: There is no universal rule, but generally lower concentration is preferable. Heavy dependence on one or two customers always warrants closer examination.

Vinu: Why do customers shift to other suppliers?

Manu: Several reasons—price competition, quality issues, delayed deliveries, technological changes, mergers, policy changes, or simply the customer's strategy to diversify vendors.

Vinu: How do bankers identify concentration risk?

Manu: By analysing the list of top customers, percentage contribution of each customer, ageing of receivables, sales trends, and dependence reflected in bank statement credits.

Vinu: Does industry type matter?

Manu: Yes. In automobile component manufacturing, dependence on a few OEMs is common. Similarly, government contractors may rely heavily on one department. Industry practices must always be understood before drawing conclusions.

Vinu: Is customer concentration linked with receivable risk?

Manu: Very closely. If the largest customer delays payment, debtors increase and working capital pressure rises. Eventually, the borrower may face difficulties in servicing bank facilities.

Vinu: Suppose the major customer is financially strong. Does that reduce the risk?

Manu: To some extent, yes. A long-standing relationship with a reputed customer provides comfort, but dependence itself still remains a risk.

Vinu: What additional questions should a banker ask?

Manu: How long has the relationship existed? Are there written contracts? Can the products be sold to other buyers? How difficult is it to replace the customer? These questions help assess the severity of the risk.

Vinu: Can customer concentration affect project viability?

Manu: Certainly. Even a profitable company can become stressed if its key customer withdraws business. Revenue diversification contributes significantly to long-term stability.

Vinu: What warning signs should credit officers watch for?

Manu: Sudden decline in orders from major customers, increasing receivable days, frequent payment delays, falling bank credits, and disputes with key buyers are important red flags.

Vinu: How can businesses reduce concentration risk?

Manu: By expanding their customer base, entering new markets, developing additional products, and avoiding excessive dependence on a single buyer.

Vinu: Should banks reject proposals merely because customer concentration is high?

Manu: Not necessarily. The risk should be understood, quantified, and mitigated. Strong customer relationships, long-term contracts, and healthy financials may provide comfort.

Vinu: What is the key takeaway for credit analysts?

Manu: Never look only at total sales. Understand who generates those sales. A company with ₹50 crore turnover spread across hundreds of customers may be safer than a company with ₹100 crore turnover dependent on one customer. Diversification often strengthens repayment capacity.

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