The Indian Factoring industry is set to grow and attract a larger number of private players. The factoring market is currently dominated by public sector banks and financial institutions such as SBI Global Factors and Canbank Factors. Banks such as DBS, HSBC and Standard Chartered offer factoring services. SBI Global Factors lead the market with nearly 80% market share. Though banks are offering factoring either through subsidiaries or as part of their service offerings, it is felt that there is a room for more independently owned factoring companies. Private players are buoyed by the new factoring Bill passed in Parliament, which has brought in greater clarity to the business.
The factoring business has not scaled up in India in the last decade. SBI Global?s 2010-11 annual report notes that the levels of factoring business in India are much lower compared with other countries and the share of Indian factoring is less than 1% of the total volumes generated in the world and the contribution of factoring products in meeting the total working capital requirement of the companies in India is less than 0.50%. Globally factoring accounts for around 5% of the total credit.
Factoring is a kind of short-term commercial finance for SMEs selling goods and services on credit. The SME will raise an invoice for payments with credit period of 60 to 120 days. This invoice or trade receivables are sold to the Factor at a discount for immediate cash. The Factor purchases the invoice from the SME and then collects the amount from the debtor when the credit period ends. The burden on collecting the payment is now on the Factor. If a bad debt occurs, then the Factor recovers money from the SME. If the factoring is done on a non-recourse basis, then in case of a bad debt the Factor absorbs the losses or shares the losses with the customer.
A growing factoring business in India would improve the cash flow for SMEs and reduce their working capital constraints as they can raise funds against invoices from factoring companies. The Factoring company funds to the extent of 85% of the invoice value and then collects it from debtors instead of the SME chasing payments.
The current Indian factoring market is estimated to be worth R25,000 crore. India Factoring & Finance Solutions, a recent entrant into the factoring business, says it will reach business of R10,000 crore in three years by doubling business every year. This year, India Factoring has achieved volumes of R2,300 crore. Sudeb Sarbadhikary, the CEO of India Factoring says they will be growing faster than SBI Global Factors which not been able touch the R10,000 crore mark despite being around for more than a decade. Sarbadhikary reckons they will be able to grow faster because as a company they are totally focused on the factoring business and is not part of a large banking set up. India Factoring is promoted by FIM Bank Group, Malta (49%), Punjab National Bank (30%), Banca IFIS, Italy (10%) and year ended March 31, 2012 was their first full year in business in India.
Another private player in India is Bibby Financial Services too feels that they bring flexibility into the business and can tailor-make products to suit customers as they are a flat and lean organisation which means the can react and respond significantly faster than large banks. Liverpool-based Bibby Financial Services is the UK?s largest independent factoring and invoice discounting company and runs a subsidiary in India.
Unlike new players who are targeting the Indian domestic market, SBI Global Factors provides international factoring, import factoring, domestic factoring and forfaiting services under one roof in India but it is facing some challenging times. SBI Global posted negative income growth for 2010-11 and posted a loss of R152.34 crore. Apart from tight liquidity and increased rate, the reasons cited by SBI Factors was inadequacies in the legal framework and the stamp duty payable for factoring transactions. But this is set to change.
The Regulation of Factors (Assignment of Receivables) Bill, 2011, passed by Parliament is going to be a game changer for the factoring business. According to Sarbadhikary the earlier laws of assigning the invoice was ambiguous but the new Act more clarity and also it calls for creation of a Central Registry for invoices which helps derisk the business. ?This will attract more private players to get into factoring and the market will grow. Some large private players are firming up plans to enter this business,? says Sarbadhikary. However the stiff capital adequacy norms imposed by RBI on factoring companies means they will have to pump more capital which is tough on them so if you want this industry to grow a separate demarcation for factoring would help, suggests Sarbadhikary According to the Factors Chain International (FCI), a global association of 247 international factoring companies, the 2011 worldwide factoring industry volume saw a 22% growth and the world total now stands at well over two trillion dollars. FCI notes that overall, the factoring industry weathered the global financial crises much better than many other providers in the financial and insurance sectors. FCI said the major markets with spectacular growth were China which grew by 77%, Russia was up 74%, South Africa (41%), Netherlands (31%), and Australia (+28%). The potential for factoring business could follow the emerging country numbers soon.