India may drive Asian factoring market
The concept of factoring - addressing the issue of delayed payments to the micro, small and medium enterprises (MSME) sector – is picking up in India.
Factoring – a concept that addresses the issue of delayed payments to the micro, small and medium enterprises (MSME) sector – is still nascent in India, but the potential exists for the country to become one of the largest markets globally for factoring in the coming years. Simply put, a factor turns the seller’s invoices into cash, and gives the seller an instant access to his dues, instead of waiting until the payment is received from the buyer. The seller, therefore, has a healthier cash flow, which improves his purchasing power, his production, sales turnover and ultimately, his profitability.
A factor also provides services like management of accounts receivables, follow-ups with buyers for overdue payment as well as periodic submission of invoice-due statements to buyers to help them plan their cash flows and make timely payments to their smaller vendors. Read On...
Today, with most established buyers increasingly becoming more comfortable with factoring transactions, the numbers of such transactions have been growing worldwide. In fact, factoring and receivables finance has been the fastest growing trade finance product offered by banks and institutions. In the last 20 years, factoring volume has grown from 400 billion euros to 2.4 trillion euros, according to a study by Factors Chain International (FCI), the umbrella organization for factoring globally.
For instance, although factoring was introduced to China only around the turn of the century around 2000, China became the second largest factoring market in the world behind the UK in just 12 years, in 2012. In 2000, Asia accounted for less than 3% of global receivables finance volume. Today, it accounts for over 23% of the global volume, especially driven by the rise of China. Peter Mulroy, secretary-general, FCI, says the potential in India is similar to what existed in China in 2000. He said, "Factoring is still nascent in India although it was introduced in 1991. Imagine, once corporate companies and MSMEs begin to see the benefits of factoring receivables finance, a market especially like India has the potential to surpass most global markets. I believe with India’s rise, Asia will take over Europe as the largest receivables finance region in the world."
Earlier this month, ICICI Bank became the tenth member of Factors Association India (FAI), the other nine being SBI Global Factors, Export Credit Guarantee Corporation of India, Canbank Factors India, India Factoring and Finance Solutions, DBS Bank, Standard Chartered Bank, Bibby Financial Services (India), IFCI Factors and HSBC.
Although the concept came to India in 1991 with the establishment of State Bank of India’s SBI Factors and Canara Banks’ Canbank Factors, it wasn’t until 2012 that India passed a Factoring Law to support the growth of the industry. With the Factoring Law, protections are now afforded to the factoring industry and there is a policy to ensure that banks finance a certain percentage to the MSME sector. Burdens such as the stamp duty tax has also been removed.
Mulroy says with the passage of the Factoring Law, there could be an exponential growth in factoring. He said, "The laws were a challenge earlier because this isn’t like a loan product. A loan agreement is backed by a court if I need to go after you if you don’t pay. In a factoring transaction, I am purchasing your asset from your balance sheet, your receivables, so there needs to be laws to allow me to buy these. When I purchase it, I have to give you cash so it is the finance of account receivables. The laws are pretty much in place now from the standpoint of the legal and policy support. I believe we’re going to start seeing a huge increase in factoring in India. We’ve seen it in every country we operate and we operate in 90 countries. Just look at the Chinese example. They had zero factoring volume in 2000 and today, in 17 years, it is about 400 billion euros. In India, it is close to only 4 billion euros."
Nonetheless, Chandrakant Salunkhe, Founder and President, Small and Medium Enterprises Chamber of India (SME) , believes the costs associated with factoring are too high. He said, "When you are talking about SMEs and MSMEs, bear in mind that a transaction can be as low as Rs 10 lakh, i.e. Rs 1 million. Paying a commission for getting this transaction factored will obviously eat into the margins which would anyways be pretty thin on such a transaction. Maybe, the commission can be charged to the buyer instead of charging the smaller vendor."
However, Salunkhe acknowledges that the recent changes in law has made factoring an attractive proposition. In fact, Salunkhe says four south east Asian countries, (Malaysia, Indonesia, Thailand, Vietnam) along with India, are expected to fuel the growth of factoring in Asia as there are indeed, signs of increase in factoring activity. Salunkhe believes India’s factoring volume will increase as the government has allowed banks to engage in non-recourse factoring. The government has also set up a receivables platform which is expected to increase factoring to the MSME sector. China, which set up a similar platform, saw increased factoring to their MSME sector as well.
- TradeBriefs Bureau -