Export Factoring

The advantages of export factoring are not really connected to financing element, but to the complete package of a factor’s services. In view of the availability of concessional export finance by banks, financing by factors will only be attractive if offered at concessive rates. For this, factors will require financing from banks at concessional rates on which subsidy will have to be provided to the banks. Besides the Export Credit (Interest Subsidy) scheme, 1968, will have to be modified suitably. This issue needs examination by the RBI in detail.

If pre-shipment credit is granted by banks and post-shipment credit by factors, it will have to be ensured that the proceeds of the post shipment credit granted by the factors liquidate the pre-shipment credit granted by banks.

Introduction of export factoring in India would certainly provide an additional window of facility to the exporters. Further, the position of realization of export proceeds of shipments made by the Indian exporters is sufficiently encouraging for interested organizations to offer factoring services to exporters from India.

In case factoring is to be introduced, the question arises whether an exporter would be absolved of his responsibility of realization of export proceeds once the factor pays to they exporter the value of the bill / invoice factored by it. In this regard, in terms of section 18 (8) of FERA, 1973, both the exporters and export factors would be liable for repatriation of export proceeds. This provision has to be modified suitably by the RBI, indicating that when factoring is done on with recourse basis only, the exporter will be liable for realization of expert proceeds. When export factoring is on without recourse basis, the responsibility will rest with the factor alone. However, in the latter case, if export proceeds are not repatriated, the RBI may not caution- list export factor and / or report the matter to the Enforcement Directorate, as is done in the case of exporters who fail to ensure repatriation of proceeds.

Factors will need uniform rules to operate in the international market. It is suggested that India may ratify and accept the UNIDROIT Convention on International Factoring. Similarly, it would beneficial for export factors to join one of the international chains of factors.

The group is in favor of extending the factoring services to exporters in India, notwithstanding the fact that they are currently being extended credit at concessional rates by banks and ECGC provides the cover for the risk involved.

Among the various organization which have been dealing with exporters, banks and ECGC appear to be more eminently suitable for handling export factoring. Besides bank (s) factors, ECGC or an organization sponsored by it, may be permitted to undertake export factoring. Any such organization, however, will have to seek approval of the RBI to undertake business of export / import factoring.

For ensuring that the exporters continue to receive finance and credit protection without any additional cost and, at the same time, avail of other services provided by factors, there could be suitable linkages between the concerned agencies. In one such model, ECGC would provide all services expected from an export factor except the financing service, which would be provided by bank(s), while under the other model the banks’ sponsored factor would provide all the series, including credit protection the finance being provided by the bank (s).

An element of competition is absolutely necessary for ensuring satisfactory services to the exporters and they should have the opportunity to make their own choice and decision regarding the factor whose services they will avail of. In view of its experience the data bank it has built up and relationship with agencies/affiliations abroad, ECGC could start factoring business within a short period, while banks will take a fairly long time before they commence exp=ort factoring. This position gives ECGC an edge over banks. Besides, being familiar with ECGC and its services, exporters too, would feel confident of approaching ECGC. It therefore need not apprehend any threat or challenging from banks, which would be later entrants.

With the expected growth in international trade, exporters, particularly the smaller ones, are likely to find services of export factoring attractive. As such, steps should be taken for the introduction of export factoring services concurrently with the extension of such services for domestic credit sales.