EXPORT-FACTORING IN INDIA: AN OVERVIEW

By : Aditi Dhool

Factoring is a fund-based facility. RBI as a measure to solve the problem of the

working capital of the suppliers extended the factoring as the new form of the
financial services in India. It was set up after the recommendation of the
Kalyanasundaram Committee in 1988. They initially developed the concept of the
inland Factoring, but later on Export Financing become one of their emphasized
areas.

In Factoring, a financial institution (factor) buys the accounts receivables of a

company (Client) and pays up to 80% (and on rare cases up to 90%) of the amount
immediately on agreement, and remaining amount i.e. 20% or 10% when the
customer pays the debt. Collection of the debt depends either on the factor or
client depending upon the type of the agreement. Usually the period of factoring is
90 to 150 days. Some factoring companies allow even more than 150 days,
depending upon the type of agreement or the relation between the factor and the
client. The factoring cost varies from 1.5% to 3% per month, according to the
transaction size, financial strength of the customer etc. The factoring in India can
be done for invoices as low as 1000Rs.

Considering the growth of the International markets and globalization there was
the need to lay emphasis on the Export factoring. In the international trade it is
customary to use two-factor system, i.e. system constituting the Export factor and
Import factor. Under this arrangement,
• Exporter sells goods on open credit.
• Export receivables are factored to the factor on the non-recourse basis
(generally). All the supporting documents relating to the export transaction
are given to the export factor.
• Export factor performs its function of credit collection, sales ledger
accounting and collection to the import factor with respect to the customers
located in the importing country.
• Import factor collects the money due from the customers concerned.
• Import factor effects the payments to the export factor on assignment or
maturity or collection or as per the agreement.
• Export factor makes payment to the exporter upon assignment or maturity
or collection or as per the agreement.
Advantage over the other Export Financial Services:
Factoring is still at the growing stage in India, though gaining popularity but it has
been compared to the long followed financial service of Bill Discounting, though
they both make finance available to the exporter against the accounts receivables
held by the client. There are a few advantages that the factoring enjoys over bill
discounting.
• Factoring involves a pre-payment against all unpaid and not-due invoices
purchased by the factor, where as in bill discounting, each bill is separately
assessed and discounted by the financial intermediary.
• Factoring involves other facilities also like collection of debts and sales
ledger administration and advisory, whereas these facilities are unavailable
in a bill discounting arrangement.
• Factoring can be a non-recourse type of an arrangement while bill
discounting is usually a recourse type of an arrangement.

Export:
Introduction of export factoring in India will certainly provide an additional
window of facility to the exporters. Further, the position of realization of export
proceeds of shipment made by the Indian exporters is sufficiently encouraging for
the interested organizations to offer factoring services to exporters from India.
There are many companies offering export-factoring services, a few like:
• SBI Factors and Commercial Services Pvt. Ltd.:
SBI Factors, a subsidiary of State Bank Of India, is one of the
leading factoring companies in India with an asset base of Rs.919.36
crores as on March 31, 2006. It is the first factoring company to be
set up in India. It was incorporated in February 1991 and
commenced business operations from April 1991. State Bank of
India and its 2 associate banks have a 70% stake in SBI Factors
while 20% is held by Small Industries Development Bank Of India
(SIDBI) and 10% by Union bank of India. As on March 31, 2006, it
has a market share of approximately 40% in the factoring business.
• Global Trade Finance Limited (GTF):
Global Trade Finance Limited (GTF) is the only provider of
international factoring, domestic factoring and forfaiting services
under one roof in India. GTF is headquartered in Mumbai. GTF
commenced its operations in September 2001, as a joint venture
between WestLB, Germany (40%), Export-Import Bank of India
(35%) and International Finance Corporation, Washington (25%),
which is the private sector arm of the World Bank. Effective
December 24, 2004, GTF's shareholding is now 40% with Export-
Import Bank of India, 38.5% with FIM Bank, Malta, 12.5% with
 IFC, Washington and 9% with Bank of Maharashtra.
GTF is a member of Factors Chain International, a global association
of international factoring companies Established in 1968, FCI has
played a major role in bringing factoring into most countries and
today has a membership of 211 factoring companies operating in 61
countries.

Factoring and its Significance in Indian Economy:

With the advent of globalization and opening up of Indian economy,
Export Factoring will play a crucial role in encouraging the
international trade. It has gained popularity among the international
traders due to the diverse services provided by it. The major boost to
the economy in the future will be through the advice or suggestions
given to the various traders that will facilitate them to perform better.
Factoring will also promote a prompt payment culture among
industrial and trading units by facilitating the overall acceleration of
the receivables turnover. The impact of this accelerated receivables
turnover will be better return on capital because of the facilitation of
greater volume of business on the same amount of capital or the same
amount of business on smaller amount of capital. Thus, such a prompt
payment culture prompted by factoring among industrial land trading
units and the resultant overall accelerated receivables turnover will
ultimately have a multiplier effect on production, employment and
economic growth.