attractive opportunity

Factoring is a receivables management service A factor advances to the client a portion of the client's receivables from the third party and later collects the receivable from the third party. Indian players include SBI, Canara and Global Trade Finance (GTF) GTF, the market leader, has no NPAs

Mumbai, March 18: Foreign banks are developing an appetite for factoring — the purchasing of commercial accounts receivables (invoices) from a business at a discount.

The business started in India in the early nineties and was the preserve of local banks and institutions. The global names keen on the business include ABN Amro Bank, Standard Chartered Bank, HSBC and Citigroup.

Factoring is a receivables management and financing service for improving the seller’s cash flow. An entity or the factor advances a fixed portion of his customer’s invoice value (receivables from a third party) and later collects the invoice from the third party.

For instance, if an exporter is to receive Rs 100 from a third party, the factor advances the exporter a fixed amount (in most cases Rs 70-95) and later recovers this amount from the exporter’s client. The advantage is the exporter does not have to wait for a fixed period of time to receive the funds from the client. Money is immediately available and hence improves the cash flow.

Factoring started with the State Bank of India (SBI) and Canara Bank, and there have been many entrants over the past few years. Global Trade Finance Ltd (GTF), the market leader, started its operations in 2001.

The major shareholders of GTF are Export-Import Bank of India, FIM Bank of Malta (formerly, First International Merchant Bank), International Finance Corporation and Bank of Maharashtra. Others to debut in this segment include Export Credit and Guarantee Corporation (ECGC).

Foreign banks are now interested in the segment. “There is an Australian factoring company which is set to enter India. Further, major foreign banks like ABN Amro, Standard Chartered, Citibank, HSBC have either commenced activities or will do it shortly,” says an industry source.

The source said demand has improved with greater awareness of the product, which is encouraging the foreign banks to set up shop. Further, established players like GTF have introduced tailor-made products suited even for small scale enterprises.

Speaking to The Telegraph, Arvind Sonmale, managing director & CEO, GTF, said the company factors up to 95 per cent of an entrepreneur’s invoice value against the underlying bill of exchange or letter of credit by the buyer. Further, the terms are simple as there is no stipulation of any collateral.

GTF, which does not have any non-performing assets (NPAs), had outstanding assets of Rs 1,434.70 crore as of December 31, 2006, a 81 per cent growth over Rs 800 crore as of December 31, 2005.