Is there a bug in how SAP Credit Management works ?

[Former Member]

For the Letter of Credit customers, it has been found that they take spurious Letter of Credit from banks and then take products from the business. However, once the goods are shipped out to these customers, then they find some way for not paying the money or delaying the payment ( documentation incomplete, etc.). So, business has requested, even though Letter of Credit covers the sales orders, but, those customers / sales orders should still be screened before the sales order can be released for further processing. So, we need a credit block.

This is the current SAP standard behavior.

Scenario# 1

Sales Order Value - 168,000.00 USD

Credit Limit of the customer - 50,000.00 USD

Letter of Credit Value - 500,000.00 USD

Risk Category of the customer - C - Moderate  Risk

Open A/R - None

Overdue A/R  - None

There is a credit limit tolerance of 10% and it is a Dynamic check with no further enhancements.

The LOC is assigned to the Sales Order.

Currently, there is no credit block for the sales order.

This looks to be a SAP bug in how credit management is working in conjunction with Letter of Credit.

I have also tested the below 2 other scenarios.

Scenario# 2

Sales Order Value - 390,500.00 USD

Credit Limit of the customer - 500,000.00 USD

Letter of Credit Value - 200,000.00 USD

Risk Category of the customer - C - Moderate  Risk

Open A/R - None

Overdue A/R  - None

There is a credit limit tolerance of 10% and it is a Dynamic check with no further enhancements.

The LOC is assigned to the Sales Order but it's ignored

Checking in VKM1 or the program CHECK_CM, I can see the credit check as failed for both - Dynamic check and also the Financial Document check.

Scenario# 3

Sales Order Value - 900,500.00 USD

Credit Limit of the customer - 300,000.00 USD

Letter of Credit Value - 200,000.00 USD

Risk Category of the customer - C - Moderate  Risk

Open A/R - None

Overdue A/R  - None

There is a credit limit tolerance of 10% and it is a Dynamic check with no further enhancements.

The LOC is assigned to the Sales Order but it's ignored

Checking in VKM1 or the program CHECK_CM, I can see the credit check as failed for both - Dynamic check and also the Financial Document check.

So, it looks as if we have a bug in how the Credit Management is working for Scenario#1.

Is there any system set-up so that we can have a credit block for Scenario#1 as well ?

Thanks,

Arindam Chanda

[maciej_jarecki]

Hi Arindam,

This is standard system functionality, if you confirm order with financial document in risk management and header or line level. Then in S066 table open item value is not changed but Guar. open ord. column is filled in.

Please check in Spro-SD-Basic Functions- Credit Management/Risk Management-Receivales Risk Management if financial document category can block this situation.

Best regards,

Maciej Jarecki

[Lakshmipathi]

Even if the LoC is set to 100% payment, system will carry out credit check which is a standard functionality.  In your case, if it is not happening, then, you need to check any customization is involved.

G. Lakshmipathi

[VeselinaPeykova]

I am very confused why in this case you use letter of credit. The whole idea of LOC is that an external party, usually a bank guarantees that you will get paid. If you don't trust a certain bank, then don't use it. Still, you need to ensure that you have presented the complete set of documents and that the customer has no basis to complain about that (complying with LOC terms).

You can also set in the specific LOC what documents need to be presented and use that as a checklist.

This is from Investopedia:

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

From my perspective, the system behavior is correct.

I wonder if this request for double-checking comes from your financial experts - they should know very well how the process works and which banks are acceptable parties in the regions, where you do business.

[Former Member]

Hi Vanessa,

You are correct in your observation that the request is coming from the Finance folks.

Considering the situation that the requirement is valid, if you observe the scenarios, you would see we have an issue here.

Scenario# 1 - Passed in Dynamic check, passed in LOC check.

Scenario# 3 - Failed in Dynamic check, failed in LOC check.

Question is which has the higher priority ? LOC or Credit Limit ?

Also, is there any system set-up so that we can have a credit block for Scenario#1 as well ? If not, we will have to go for an enhancement to the existing system.

[VeselinaPeykova]

I would suggest to make a better use of LOC statuses in general and not approve a LOC before you check how trustworthy is the bank and how much you can rely on your partners.

Case 1: letter of credit value covers the order value - it is correct to pass credit check if all other prerequisites - dates, incoterms etc are fulfilled. If you don't approve the LOC, it will go through credit block, of course.

Case 3: letter of credit and credit limit are not enough to cover the order value. Why do you expect that the order will pass credit check?

Order release should be always a manual activity in this scenario, because you have risks (amount in that case) not covered by LOC and by credit limit.

I am not sure what you mean by LOC is 'ignored' - was there no status set at all or the check failed?

From what I know, it is possible to bypass or force certain checks with custom routines in OVA8, so if I don't get expected results, this will be the first place I would look at.