Factoring and Fortaiting – Critical aspects

Organizational Set up:

In the beginning, only select promoter institutions/groups/individuals with good track record in financial services and competent management should be permitted to enter into this new field.

As regards the coverage of industries/ sectors by such organizations, initially the organizations may be promoted on a zonal basis, one each for north, east, south and west. Such an arrangement would obviate the necessity of each organization having an all-India network.

Here are distinct advantages in the banks associated with handling of factoring business. Apart from the fact that they have considerable experience in financing and collection of receivables, they also have access to credit information of both the sellers and buyers; besides, their large network of branches, as also availability of sufficient financial resources, would provide additional advantages to them.

Subsidiaries or associates of banks are ideally suited for undertaking this business. Initially, it would be desirable to have only four or five organizations which could be promoted, either individually by the leading banks or jointly by a few major banks having a large network of branches. Factoring activities could perhaps be taken up by the Small Industries Development Bank of India, preferably in association with one or more commercial banks.

Educating Business Community About factoring:

Factoring being an entirely new concept, the business community should first be educated about the nature and scope of these services and the benefits accruing there from. The branches of banks would serve as a useful medium for extensive dissemination of information.

Mechanism of Factoring Operation:

Factors cannot extend their services efficiently, effectively and economically without the support of computers, as also quick and dependable means of communicating. Therefore, concurrent with consideration of various aspects relating to commencement of factoring operations the promoter should initiate measures for organizing a network of computers/ dedicated lines linking the branches/ agents in different parts of the country for accounting follow up remittance and other activities involved in factoring business.

Credit Investigation:

Up to date reliable information relating to market reputation, financial standing, business prospects etc of parties engaged in buying and selling of goods and services is if utmost importance. However, at present there are no specialized agencies in India which collect and furnish such information, as are operating in industrially developed countries. Hence, the Government and the RBI should initiate appropriate measures immediately for setting up such specialized agencies, irrespective of the needs of the factoring organizations. Till such agencies become fully operative, the factors may have to rely on such information on clients / customers as could be collected through banks or other sources, not withstanding their limitations.

Linkages between Banks and Factors:

Since it is envisaged that the suppliers would be able to obtain services from both banks and factoring organizations, it is necessary to provide for proper linkages between banks and factors. Thus, there should be arrangements where under banks and factors furnish to each other information relating to parties which approach more than one agency. It is also envisaged that there could be a three party tie up the debt being assigned to factors by suppliers and the former borrowing from banks. Alternatively, the supplier would borrow from bank(s) and avail of debt protection, collection and sales ledger management services from a factor. Besides, there are other areas also in which banks and factors should collaborate for letter working capital management, in view of the specialized knowledge, skills and contacts of the factors. Such collaborative effort could help in prevention of sickness in units.