Organizational Profile – Factoring

The RBI initially contemplated growth of factoring services on a zonal/regional basis covering the entire country with one/more bank(s) concentrating in one zone at a time. It also preferred factoring services through subsidiaries of nationalized banks. More than one bank can jointly operate in a region forming a subsidiary.

The RBI identified banks region wise to sponsor subsidiaries and provide factoring to clients in the specified regions: (1) State bank of India for the western region, (2) Canara Bank for the southern zone, (3) Punjab National Bank for the northern region and (4) Allahabad Bank for the eastern zone. However, only the first two identified banks sponsored factoring services. Thus, at present two factoring organizations exist in the country.

SBI factors and Commercial Services Ltd, (SBI FACS): It was floated / promoted jointly by the State Bank of India, Union Bank of India and Small industries Development Bank of India (SIDBI) in March 1991 and commenced operations in April 1991. It has a paid up capital of Rs 25 crore. During 1991-92 , the factored debt amounted to Rs 30 crore with gross profit margin of Rs 2 crore which rose to Rs 6.16 crore comprising Rs 3.10 crore of factoring income and Rs 3.06 crore of the other income. While it offered factoring to 23 clients in 1992-93 the number rose to 53 during 1994-95. At the end of 1994-95 its net worth at Rs 29.74 crore. The SBI FACS has become an associate member of the Factors Chain International based in Amsterdam. It has also joined EDIFACT – the communication network of the Factors Chain International for electronic data interchange for speedy communication recently.

Can-bank Factors Ltd: Jointly promoted by the Canara bank, Andhra Bank and SIDBI in August 1992 to operate in the south zone, its Rs 10 crore paid up capital was contributed in the proportion of 60:20:20 by three promoters respectively, which was subsequently raised. At the end of 1994-95 it had a net worth of Rs 23.82 crore, with gross earnings amounting to Rs 12.70 crore of which income from factoring stood at Rs 12.16 crore compared to Rs 69 lakh at the end of 1991-92 . The factoring business done by the Can-bank Factors Ltd, during 1991-92 and 1994-95 aggregated Rs 26 crore and Rs 54.21 crore respectively.

The regional restrictions on their operations were recently removed by the RBI. They can, therefore operate over a wider market now.

From the beginning of 1997, the first private sector factoring company, namely, Foremost Factors Ltd (FFL) has commenced operations.

Nature of Factoring Services/Operations:

The salient features of the factoring services, in India in terms of the operations of the SBI FACS and Can-bank Factors are recapitulated as follows:

Domestic Factoring: This type of factoring service is advance recourse factoring. The factors undertake collection and credit service. Deferred credit transaction type of credit sales are not eligible for factoring which is confined only to short term debt. A seller (client) can have his invoice converted into instant cash up to 80 percent. They also undertake to maintain sales ledger by using computerized systems monthly sales analysis and, overdue invoice analysis. Customers’ payment reports are also provided to the client. Once a line of credit is established, availability in cash is directly geared to sales. These services are provided against receivables service charges fee without guarantee and security being insisted upon.

Export Factoring: The RBI has approved the scheme evolved by the Export Credit Guarantee Corporation of India Ltd., for providing a non-fund based export factoring service to the exporters who are ECGC policy holders. Under the scheme the ECGC undertakes non-fund based export factoring as an in house service. It grants, by an endorsement to the policy, 100 per cent credit protection for bills drawn on approved overseas buyers.