Budget 2018: Since its inception, factoring business has made a significant progress in India. Considering the large MSME framework existent in the country, strengthening of factoring business makes much more sense. However, the RBI must ensure there is further improvement in the legal system so that the industry can grow further, Tushar Buch, MD and CEO, SBI Global Factors Ltd told FE Online. “A big push by the Regulator – after all factoring services had begun in 1991 following recommendations by Kalyansundaram Committee to fill credit for Small Scale Industry. Further improvement in legal system can be another enabler,” Tushar Buch told FE Online. At present , action under Sec 138 of N I Act can take anything upto 5 years or more to reach a logical conclusion! Globally, factoring has grown with support of credit insurance. In India after the 2010 Paramount Air debacle, factors have been kept out of the purview of credit insurance till date; even though the insurance industry has been permitted to introduce the product by the IRDAI,” he added.
Ahead of Budget 2018, Tushar Buch expressed that the projection made by different ratings agencies that India’s economic growth rate will see an uptick in 2018-19 is likely to help tap its potential more and ensure factoring is accepted as a mainstream financial product. Not only this, more power must be vested in the MSME Development Act 2016 by making a PSU or government or corporate buyer compulsorily accept assignment of receivables made in favour of factors, Tushar Buch said.
The expectations of the factoring industry from Finance Minister Arun Jaitley in Budget 2018 hold water if India truly aspires to be a global leader in this field since India is a smaller player in comparison to the Asian neighbours like China and Japan. There is scope as well as need for more players for the industry to reach a critical mass, he believes.
Here are the edited excerpts of Tushar Buch’s interview with Ashish Pandey and Shaleen Agrawal of FE Online
Q1. What is your outlook for the factoring business this year? What will be the driving forces?
I am optimistic about acceptance of factoring as a mainstream financial product going forward. The projected uptick in growth rate of our economy by 2018-19 augurs well. Since policy favours an inclusive growth and MSME sector shall have a larger role, factoring is the logical ‘best fit’ partner! The second driving force shall be gradual willingness of industry majors and large corporate to accept (and not object to) assignment of receivables made by sellers/service providers in favour of factors in terms of Factoring Regulation Act, 2011. Commencement of TReDS platforms and push by the government to PSU buyers to get aboard TReDS should help in breaking glass ceilings.
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Third reason – if more firms are to be part of exports growth story, Export Factoring services by factors has a great potential. Finally, Factors can complement banks in financing receivables – unlike banks which provide on tap line of credit against receivables declared by a borrower, factors do it invoice by invoice; thus making the process more transparent and capable of giving early warning signals-thus helping banks to avoid surprises!
Q2. How can factoring business help fulfil India’s global financial aspirations?
First of all, if Indian share of global trade is to increase from around 1%, factoring can be an important catalyst. At present, FCI (formerly, the Factors Chain International) with HQ at Amsterdam is a global association of factors with membership of 400 factors/banks providing factoring services in 90 countries. Under its unique 2 Factor Model and through the network of its members, the FCI has created a platform to support cross border trade. All members are committed to a protocol called the General Rules For International Factoring (GRIF). While SBI Global Factors Ltd, India Factoring & Finance Solutions Pvt Ltd and a couple of other factors support exports from India, the reciprocal service for providing credit cover on Indian buyers is missing- largely due to non availability of credit insurance.
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The FCI is in readiness to offer another product – the 3 corner SCF (Supply Chain Finance) under which it is expected that export factoring services may be offered to global supply chain based on guarantee of an anchor buyer. This is a completely digitized solution in which FCI has invested and is expected to be made available to its members on a kind of ‘pay as you use’ basis. Secondly, as economies mature, trade grows on ‘open account’ terms, rather than on back of traditional settlement methods like RTGS Transfers, Letters of Credit or Standby LCs. Open Accounts Payables and Receivables Management is the DNA of factors. In this way factors have the potential to support India’s global trade and financial aspirations.
Q3. How can India’s factoring business leverage the robust banking and financial sector?
I can only add that for the growing services sector (ITeS, fleet transport, logistics services, hospitality, housekeeping,etc), factoring is a best fit solution.In these areas, it can complement banks who are not best placed to fill the finance gap in this segment.
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Q4. What are SBI Global Factors’ plans for the year ahead?
To be a vibrant and valuable subsidiary in the SBI Group by aiming to double its turnover and profits of March 2018 level by March 2020. Export Factoring, taking a major market share in TReDS, providing Credit Cover on Indian buyers under FCI’s 2 Factor Model and exploring more opportunities in Account Payables and Account Receivables space in MSME sector are some of the aspirations. With SBI as a major partner, we have plans to leverage Group Synergy to become a bigger NBFC.
Q5. How has the business climate evolved post GST implementation and demonetisation?
It has heralded an era of transparency. After introduction of e-waybill which is next on anvil, an invoice would become a dependable document vouching movement of goods/supply of services. With further digitization and integration of GSTN with a registry (say CERSAI) and an IT architecture like TReDS for example, true price discovery for financing trade transactions can emerge. Then truly, factors can be the voice of an invoice!
Q6. How much do you think the TReDS, RXIL and other such exchanges are helping the vast MSME segment of country in obtaining adequate finance?
TReDS have brought in a paradigm change.With expected entry of PSU first and hopefully Government Departments the next,one can hope to witness a sea change in ability of MSMEs to get a fair deal in receiving timely payments for goods and services supplied to Industry majors and Government departments. Easily the best initiative in ease of doing business for the MSME sector!