Background and Terms of Reference – Kalyanasundaram Report

Purchaser of goods and services often delay payments, resulting in working capital problems for the suppliers, particularly the SSI units. The RBI had initiated a series of measures to alleviate the difficulties of the suppliers. However, banks have not been effective in implementing these measures due to operational constraints. The RBI perceived the extension of factoring service as one of the measures to assist in the expeditious collection of receivables:

The Kalyanasundaram Group was constituted to examine the feasibility and mechanics of starting factoring services/ organizations. Its terms of reference included:

1) Consideration of need and scope for one / more factoring organization;
2) Nature of their constitution; in public, private or joint sector;
3) Changes in legal framework for promoting factoring
4) Feasibility of extension of factoring service to exporters; and
5) Other matters relating to factoring.

Concept and Types of Factoring Services:

Factoring service as a tool for assisting the suppliers in the matter of financing and collection of receivables, is being extensively and increasingly used in several economically developed countries since the last three decades, although these services have been offered in one form or other since the nineteenth century in a few countries. Modern factoring involves a continuing arrangement under which a financing institution assumes the credit and collection functions for its client, purchases his receivables as they arise (with or without recourse to him for credit losses, i.e. the customer’s financial inability to pay) maintains the sales ledger, attends to other book keeping duties relating to such accounts receivables and performs other auxiliary functions, The various services offered by factors for domestic sales are of six types, viz, (1)full factoring (2) recourse factoring (3) maturity factoring, (4) advance factoring, (5) undisclosed factoring and (6) invoice discounting.

So far as international trade is concerned, it is customary to use a two factor system under which there is an export factor and an import factor. Under this arrangement, while the export factor provides financing and other services as required by the exporter, the import factor undertakes credit assessment of importers, establishes credit lines on them wherever possible, undertakes control of receivables and takes whatever steps are necessary to collect outstanding dues. Recourse factoring, direct export factoring, direct import factoring and back-to-back factoring are some of the variations of factoring services available to exporters.

Need for Factoring Services in India and Assessment of Demand:

There is sufficient scope for the introduction of factoring services in India, which would be complementary to the services provided by banks. The introduction of export factoring services in India would provide an additional facility to exporters.

Suppliers from different sectors would welcome factoring services. Since banks are already financing domestic receivables and providing credit against export receivables at concessional rates, many suppliers may prefer to avail of only one or more of the other services (i.e. administration of sales ledger, credit protection and collection of dues) offered by the factors, while continuing to avail of fiancé from banks. While quantification of the demand has not been possible, it is assessed that it would grow sufficiently so as to make factoring business a commercially viable proposition within a period of two / three years.

On the export front, it is perceived that there would be a fairly good availment of various services offered by the export factors, as the exports from India on non-L/C terms are as much as 60 per cent of the total exports. Even those exporters who are now able to secure L/Cs (letter of credit) my find export factoring attractive as L/Cs; being transaction oriented, are not ideal for repetitive transactions. Also, there is a growing resistance from overseas buyers to provide L/Cs.

With a view to attaining a balanced dispersal of risks, factors should offer their services to all industries and all sectors of the economy. However, care has to be taken to ensure that the new institutions acquire an in-depth knowledge of the working of industries concerned before assuming the risks.