Master Class Lecture
Higher School of Economics
“Factoring: Russian & International
26th May 2011
* What is factoring?
* Russian Factoring market – overview/history
* International factoring market – overview/history
* Pre & Post Credit Crisis
* Factoring Chains, Direct approach
* ABL and other products (Russia v others markets)
* Factoring v Traditional banking
* Different markets, different risks & approach
* Software, systems (Russian v others)
* The future
What is Factoring?....
* Factoring is “Finance, Credit Management & sometimes Insurance
* Factoring, if properly implemented, provides a means to undertake
highly profitable business with SME clients with minimum risk,
including clients that are not natural candidates for bank
conventional products. Clients become ideal for factoring when:
There is downward mobility from banks, when the client is no
longer suitable for conventional lending and banking services;
when the client is growing but has an inadequate balance sheet
and/or collateral to secure funding; when there is a need to
restructure a companies existing debts. Russian and Foreign Banks
in Russia are very negative towards SME lending (like many parts of
world) and many have liquidity problems. It a great opportunity for
Russian Factoring Market – Overview
* Huge growth in last five years
Assignment values in 2004 = $5 Billion
Assignment values in 2008 = $40 Billion
* 90% Recourse Factoring, 5% Reverse, 5% International
* 5 key factoring players, all Bank owned no independents!
* Now totally Non Regulated factoring environment (since
April 09). In early 2009 the Russian Government stated it fully
supports factoring (hence new law of deregulation) as a
means of assisting SME’s
* Russian Courts fully support factoring.
* Emergent market GDP growth one of the highest in world
* Compared to mature markets, high “returns” and relatively
Russian Factoring market – continued…
In Russian factoring, there are three types of Factoring
Businesses. Relating this to the top 10:
1) Specialist Bank only offering factoring – one player *
2) Bank Department – six players
3) Separate Legal entity - three players
All the top ten players are bank owned – no independents!
Three players are foreign banks and seven Russian Banks
• Given the recent change in Law in regulation, this option
is now not best advise.
International factoring Market
Yr 2005 2006 2007 2008 2009 2010
1,016,547 1,134,288 1,299,127 1,325,111 1,283,559 1,648,229
Total International Factoriing
76,979 98,425 118,271 144,408 133,633 179,434
Pre & Post Credit Crisis
* Russian factoring market down from $40 Billion
to $10 Billion
* UK (Largest World market) down from $350Billion
to $300 Billion
* All world markets down, losses being made and
Staff loses jobs
2010/2011 saw recovery sector now profitable and
Factoring Chains & Direct Approach
• Factors Chain International
• International Factors Group
* Direct Approach
Let’s discuss in detail….
ABL (Asset Based Lending) and other products
• What is ABL?
• Why do we mention ABL in relation to Factoring?
We will discuss in detail, the origins and why it is related to
Factoring v Traditional Banking products
• Factoring is usually more expensive because it provides
“added value” services, the collateral is more labour
intensive and there is a risk premium.
• Traditional bank products usually relay upon a high % of
hard security collateral which many SME businesses
cannot provide – hence the growth and attraction of
factoring in this sector
Different Markets, different risk and approach:
Russia has very “strong and clear legal process” in relation to the purchase of assets
(invoices) – Civil Code Ch42. Factoring in Russia is a “purchase of invoices” and not
The most significant risks are fraud risks rather than credit risks.
Fraud Risks: Fraud typically arises in three different ways:
Internal fraud (the worst kind), where internal controls are compromised and (with cooperation of a
client), non-existent invoices are financed for a long period creating a pyramid scheme where new
invoices are invented and financed to repay old. The danger is that if internal controls are
compromised, this can grow to a significant size.
Double financing of invoices – where customers finance invoices with multiple factoring companies
Invented invoices – where customers simply invent invoices and finance them (and variations).
These fraud risks are mitigated by (a) formal separation of functions within the factoring operations,
(b) significant internal audit procedures and controls, (c) proper security and underwriting functions
and (d) proper administrative process and use of suitable factoring products only (i.e.: “full factoring”
and not “invoice discounting”).
Different Markets, different Risk – continued…
The main focus of the credit assessment would be in relation to the collect-ability of the
invoice rather than the pure creditworthiness of the debtor (or the client). It should be
assumed that most of the business will be “with recourse” to both client and debtor,
providing a double-layer of protection. Then the credit risk procedures will have three
main parts (as below) which are “underpinned” by robust/strong and diligent
management of fraud prevention which is key to any factoring business.
Dealing with the asset (the “invoice”), assessing the financial controls of the client, the
level of credit notes, quality of the products, relationship between the client and its
debtors, potential offset, contingent liability issues, payment behavior of debtors and so
Documentation and paperwork standards to ensure that original documents, properly
executed, relating to the asset are obtained prior to financing – appropriate to the client
and its business, plus “security and economic” checks using Russian methodology (in
addition to regular checks) that should be applied.
Credit assessment of both client and debtor (within a simpler framework than would be
used by a SME lending Dept within bank
Software & Systems (Russia compared to other markets)
* Structure of Product – Recourse/Purchase
* Risk Management – Robust systems, processes and
controls by software and manual, robust access controls
(internal fraud), very “strong” internal audit procedures
* Systems – Main software is European or from USA there
are two Russian software suppliers
* KPI’s/Performance monitors for performance improvement
The future ?
Barry R Rogers MICM DipABFA
Tel: +7 917 598 5162 (Russia)
+44 7771 810544 (UK)