BW Communities

Factoring In The SME Sector

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[India Factoring and Finance Solutions — a joint venture NBFC between Punjab National Bank, Malta-based credit institution, FIM Bank Group, Italy-based Banca IFIS and Blend Financial Services of Mumbai — is in the business of ‘factoring' - providing trade finance services for small and medium enterprises (SMEs) and small-scale industries with a special focus on the ever-increasing international (export and import) and domestic factoring. India Factoring CEO Sudeb Sarbadhikary talked to BW's Tanushree Pillai about what ails the SME sector and what needs to be done. Excerpts from the interview How did India Factoring come into being? Ours is a Joint Venture between FIM Bank, with 49 per cent stake, Punjab National Bank with 30 per cent stake and other minor investors (Banca – with 10 per cent stake), Blend Financial with 1 per cent. The rest 10 per cent is held in Employee Stock Options (ESOPs). The MoU was first signed in 2009 and we went to the RBI for a license in March 2010 and we have been in the business since October 2010. India Factoring operates its business from Delhi, Mumbai, Chennai, Bangalore, Kolkata, Ahmedabad and Hyderabad. What is it that India Factoring does? We do what is called ‘factoring' – which is essentially receivable financing. In a B2B environment, typically, there are credit invoices (across the table payments are rare). Large corporate procure from smaller vendors and the vendors mostly get paid about 3-4 months later. Effectively, the receivables are assigned to us and we finance these suppliers and we collect the money from the final buyers. These small vendors mostly have small balance sheets and do not have the adequacy to get banking finance. With us in the picture, they get the flexibility to raise resources. That's the principal benefits for these small vendors and hence, our aim is to provide liquidity to the SME sector, although our risk is on the larger corporate. SMEs are always challenged for funds and have to raise funds from elsewhere. This sector plays a vital role in the growth of our economy by contributing 45 per cent of the industrial output, 40 per cent of exports. It also provdes 42 million jobs. Less than 20 per cent of bank finance goes in to the SME sector, so there is a huge lacuna there. The interest is charged from the SME. We are pre-paying the invoices. Sometimes, there are deductions – like a back up cover (typically 20 per cent). We currently have 100 clients on a pan-India basis. Our focus will remain on the SME sector and we aim to triple our client base by March 2012. Our stockholders give us a committed capital as and when we hit different milestones. We are investigating possibilities of reaching geographical areas where there is a huge SME presence – like Coimbatore, Pune, Chandigarh. We recently forayed into Punjab and Haryana as well. What is the basis of this geographical area selection? For us it was important to have a pan-India presence from the beginning. My client could be in Mumbai, but it could be providing receivables to his client in the south. We recently received permission to do export factoring, which will help SME exporters. We are also part of IFG – International Factoring Group – we can use their skill sets to assess buyers in different countries - which helps us support Indian export to these countries. Most of our clients are from the manufacturing side, although we do have exposure in auto, textile, IT, hardware and software companies. Our association with PNB has helped us a lot in reaching out to clients in rural India too. How big is the factoring industry here? Current turnover for the India factoring industry would be about Rs 200 crore. There are five independent companies, and some banks are also present. There is SBI Global, Canbank (Canara Bank subsidiary), IFCI Factors, Bibby Factors (UK based), along with India Factoring. HSBC, DBS and Standard Chartered banks too have an embedded factoring desk within the bank. There isn't much awareness about factoring here. Currently, there is a bill that is being tabled in Parliament. We are hoping once the bill goes through, there will be more players, more education. Globally, factoring is a huge industry. About 60-70 per cent of procurement for big retail brands is through factoring. The reason why this industry is so huge in developed markets is because of laws clearly defining the industry. For a factoring company, the biggest challenge is whether it has a right on the receivables. Here, in India, there no clear laws which explain what a factory company can do in the event of a non-payment. What happens when no payment is made to the factoring company? In that event, we would recourse it back to the SME – which is the reason we are not aggressively pitching to extremely small enterprises. We need to be comfortable about the fact that the SME will pay us even if there is no final buyer in the end. This in a way has inhibited the growth of SMEs. What is forfaiting? Vendor forfaiting is a trade finance where financing is done on a completely non-recourse basis. It involves purchasing of credit instruments like letters of credit etc on a non recourse basis from the seller of goods. These instruments are supported by buyer's bank and hence have an obligor risk which is mainly a bank/financial institution risk. The forfaiter deducts interest (in form of discount) and pays the residual proceeds to the seller on non-recourse basis. How it works is that the seller ships/provides goods/services as per its contract and submits necessary documentation to us or to our bankers.  Trade documents are transmitted to the importer's bank for acceptance and/or assignment of proceeds to us. On receipt of such confirmation, we pay discounted proceeds to the seller on a non-recourse basis and we assume payment risk of the importer's bank. The letter of credit is the responsibility of a third party. This product is engineered for exporters who typically work with developing countries. Forfaiting is a service-based business and it's mostly our factoring clients who use the service.