SR. TITLE PAGE
EXECUTIVE SUMMARY 5
A STUDY OF FACTORING
1 History of Factoring 6
2 What is Factoring? 7
3 Process of Factoring 9
4 Functions of a Factor 10
5 Benefits of Factoring 12
6 Factoring: Off-Balance Sheet Mode Of Financing 14
7 Forms of Factoring 16
8 Process of Export Factoring 19
9 Difference between Bills discounting & Factoring 20
10 Difference between Cash credit and Factoring 21
11 Difference between Factoring and Forfaiting 22
12 Mechanics Of Forfaiting 23
13 Credit Evaluation of clients 24
14 Legal Aspects of Factoring 26
B INDIAN SCENARIO
15 Factoring in India 28
16 Recommendation Of Kalyansundaram Committee 29
17 RBI Guidelines 32
18 Organizational Profile 33
18a SBI Factors ltd. 34
18b Canbank Factors 36
18c GTFL 38
C GLOBAL PERSPECTIVE
19 Factors Chain International 40
20 History of FCI 41
21 Fresh Statistics 42
D FUTURE PROSPECT
22 Problems & Suggestions 44
23 Factoring & Economy 50
1 CHINA – Case study on factoring (2005) 51
2 CHILE - Case study on factoring (2004) 53
3 Summary Of The Report Of The Study Group For 55
Examining Introduction Of Factoring Services In India
4 Global Factoring - Annual Volume by Country 66
5 Global factoring: Relative Importance 67
6 Leading Factoring Companies & Associations 68
This project seeks to understand the „Development of Factoring’ in India & then find
out the reasons for lack of awareness of factoring among Small Scale Industries and Small &
The approach adopted by me was as follows :
Initially I studied the factoring in India, its regulations, players, etc.
During this period, I encountered numerous problems hindering growth of factoring
industry like lack of awareness among target audience (SSIs & SMEs), no proper legislation
defining legal aspects, documentation, recovery measures & scope of factoring activities in India.
Banks also consider factors to be a competitor instead of a supplement. Then to have a broader
perspective I talked to an executive from HSBC factors to understand their procedures & obtain
industry opinion & suggestion regarding development of factoring in India.
I, in my project, studied concepts of factoring, different types of factoring, mechanism
of domestic and international factoring, differences between factoring and various other financial
products, how factoring can be beneficial to clients, customers, bankers etc in greater detail. I
further studied legal aspects of factoring, Kalyansundaram Committee report, major players which
exists in factoring business in India & global prospective with special reference to FCI. Two case
studies are appended at the end, depicting the role of factors in growth & expansion of the business.
At the end, a small effort has been taken to make a few suggestions which if implemented can lead
to growth of factoring in India.
The future of factoring in India will be bright only when proper laws are established
and more players foray into the field and the present unorganised small-scale sector becomes more
HISTORY OF FACTORING
The term factor comes from the Latin verb facio, which means “he who does things.”
As the Latin verb suggests, the history of factoring is the history of agents doing things for others.
For Example, factoring was a well-developed activity in England in the 14th century, where it
evolved with the growth of the wool industry. The job of the factors centered on their functions as
sales agents, or commission merchants, for textile mills. The distances between customers and
manufacturers made commerce problematic- given the primitive forms of transportation and
communication –so factors assumed complementary functions to address the business challenges
that arose because of these distances.
At the centre of these functions was the factors‟ role as the sales force for the textile
mills. As a by product of this activity, factors assumed other marketing and distribution functions,
including offering advice on customer tastes, product demand, and warehousing services- so that
mills could ship merchandise to the factors, who would then ship to the final customers. Factors
also assumed some critical financial functions on behalf of the mills. They offered credit advice on
how much to sell on account to potential customers. They also guaranteed payments to the mills,
assuming full responsibility for the creditworthiness of the mills‟ customers.
Thus, in essence, factoring was fully reflected economically in the financial component
of the factoring business, as it existed 600 years ago. The difference between today and 600 years
ago is that the sales, or “agenting” component has been purged from the factoring relationship. But
factoring as it is typically practiced in both developed and developing economies can still be
viewed as a bundle of activities. In addition to financing, factors typically provide their clients with
two other services: credit and collections.
Factoring, in an organized way started in U.S.A. in the 1920s and was introduced to
the other parts of the world in 1960s. In India factoring business started in 1991. Today there are
about 692 companies offering factoring services in more than 60 countries.
What is FACTORING
Factoring, fund-based financial service, involves transfer of the collection of
receivables and the related bookkeeping functions from the firm to a financial intermediary called
the factor. In addition, the factor often extends a line of credit against the receivables of the firm.
Factoring can be defined as the sale of book debts by a firm (referred to as the „client‟) to a
financial intermediary called the factor on the understanding that the factor will pay for the debts
as and when they are collected or on a guaranteed payment date. Usually the factor makes a part
payment immediately after the debts are purchased thereby providing immediate liquidity to the
Unidroit Convention on International Factoring states that factor must perform atleast two of the
following functions :
1. Financing working Capital needs.
2. Maintaining of ledger.
3. Collection of receivables.
4. Protection against default in payment by debtors.
Margins: The factor provides an advance limited to 80 percent of the value of receivables factored.
The factor never provides hundred percent finance. He maintains a margin called the factor
reserve‟ to provide for disputes and deductions relating to the bills assigned to him. The factor
reserve is a safety net for protecting the factor against contingencies such as sales returns, disputed
Cost Of Factoring: Various charges levied by factoring company includes :
1. Service Charges - For rendering the services of collection and maintenance of sales ledger,
the factor charges commission expressed as a flat percentage of the value of debts
purchased and collects this commission upfront (at the time of purchasing the debts).
2. Discount Charges - For making an immediate part payment against the debts purchased
(which is an advance), the factor charges interest at a rate which is marginally higher than
the rate of interest charged by banks on working capital advance. The interest charge is
calculated for the period between the date of advance payment and the date of collection or
the guaranteed payment date. The interest charge is collected upfront. . The rate of interest
is usually determined depending upon :
the prevailing short-term rate of interest; and
the client‟s financial standing and
volume of turnover.
the customer‟s financial standing & payment habits
PROCESS OF FACTORING
FUNCTIONS OF A FACTOR
Collection of receivables can be considered as the most important function of a factor. A typical
collection program of the factor consists of the following steps:
1. The factor sends statements of accounts to the customers prior to the due dates and routine
collection letters around the due dates.
2. If a debt reaches a certain point in being overdue, the factor initiates personal collection efforts
which can be in the form of a personal letter, telephonic reminder or visit to the premises of the
3. The factor resorts to legal action if the debt is irrecoverable by other means.
The factor maintains a sales ledger for each client. In addition to the sales-ledger, the factor also
maintains a customer-wise record of payments spread over a period of time so that any change in
the pattern of payment can be easily picked up.
When receivables are purchased under a non-recourse factoring arrangement, the factor establishes
a line of credit or defines the credit limit up to which the client can sell to the customer. The credit
line or limit approved for each customer will depend upon the customer‟s financial position, his
past payment record and the value of goods sold by the client to the customer.
We said that a factor usually pays for a part of the debts purchased immediately and charges
interest on the part payment made for the period between the date of purchase and the collection
date/guaranteed payment date. Also that the factor does not provide hundred percent finance and
maintains a margin called the factor reserve.
Given the specialized knowledge of the factor about the market(s) in which the client operates, he
is in a better position to advise the client on the customers‟ perceptions of the firm‟s products,
changes called for in the marketing strategies, emerging trends and ways of responding to these
trends. Another incidental service which the factor provides is an audit of the procedures followed
for invoicing, delivery and dealing with sales returns. The factor regularly audits these procedures
in order to minimize the problems at the time of collection. From the client‟s angle, such an audit
reveals the weak links which have to be strengthened and areas where the existing procedures have
to be modified or toned-up.
BENEFITS OF FACTORING
1) Factoring is not a threat to banking; it is a financial service complementary to that of the
2) Factoring ensures improved liquidity of clients.
3) Factoring facility does not violate maximum permissible bank finance norms.
4) Credit sales are closely monitored by the Factor and the proceeds are routed through the
clients‟ accounts with the bank.
5) Factoring improves the quality of advances of banks.
1) Since credit sales are converted into cash, the working capital cycle becomes quicker, and
turns over many more times a year generating more profits.
2) Since many factors undertake the responsibility of debt collection on all the invoices
factored, client is relieved of this onerous task.
3) Client is able to offer competitive terms to the buyers and improve sales and ultimately
4) Maintenance of sales ledgers becomes factors‟ responsibility and they keep the clients
informed through monthly sales analysis, overdue invoice analysis and customer payment
5) Factoring offers a highly flexible mode of cash generation against receivables. Once a line
of credit is established, availability of cash is directly geared to sales.
1) There becomes no need to accept any bills. Only simple invoices duly assigned for
payment to the factor, are drawn on the customer.
2) The customer gets adequate credit period for payment of assigned debts.
3) Factoring facilitates the customers credit purchases.
4) Since there is no need for bank guarantee, letter of credit, advance payment, etc., the
customer saves on the high bank charges and expenses.
5) There is no documentation hassles since all the customer has to do is to execute an
acknowledgement of the notification of assignment of invoices by his suppliers,
undertaking thereby to make payment of the invoices to the factor.
6) The customer is furnished with periodical statement by the factors of outstanding invoices
drawn on the customer.
FACTORING:OFF-BALANCE SHEET MODE OF FINANCING
Impact of Advance Factoring and Bank Overdraft on Liquidity Rations
The tables reveal that :-
Advance factoring per se does not alter the current ratio of the firm. This is because the
arrangement does not result in the creation of a current liability. It simply rearranges the
current assets by replacing receivables with cash and factor dues. Of course, the current
ratio can be increased by utilizing the additional cash in the manner specified in the table.
In fact, the current ratio can be increased to a maximum of 4.33 : 1 by utilizing the entire
factor advance to reduce the current liabilities. At the other extreme, the firm can choose to
keep the current ratio at 1.67 : 1 by not utilizing the additional cash or by utilizing it for
increasing the investment in inventory.
The impact of bank overdraft on the current ratio of the firm is obvious. Prior to the
utilization of cash in the manner specified, the current ratio was 1.37:1 which has been
improved to 1.59 : 1 by utilizing a major portion of the additional cash to reduce the
current liabilities. One can verify that the maximum current ratio of 1.67 : 1 can be reached
by utilizing the entire bank overdraft to reduce the current liabilities.
Is factoring advantageous to firms which can afford to have a full fledged credit department?
The answer is „Yes‟ provided the factor can carry out the functions of the credit department
FORMS OF FACTORING
The factor purchases the receivables on the condition that the loss arising on account of
irrecoverable receivables will be borne by the client. Thus, under a recourse factoring arrangement,
the factor has recourse to the client if the debt purchased turns out to be irrecoverable.
As the name implies, the factor has no recourse to the client if the debt purchased turns out to be
irrecoverable. Since the factor bears the losses arising on account of irrecoverable debts
receivables), the factor charges a higher commission (the additional commission is called the del
credere commission). While non-recourse factoring is the most common form of factoring in
countries like the USA and the UK, in the Indian context, factoring is done with recourse to the
Under this type of factoring arrangement, the factor does not make any advance payment. The
factor pays the client either on a guaranteed payment date or on the date of collection. The
guaranteed payment date is usually fixed taking into account the previous ledger experience of the
client and a period for slow collection after the due date of the invoice.
Under this arrangement, the factor provides an advance varying between 75-85 percent of the
value of receivables factored. The balance is paid upon collection or on the guaranteed payment
Strictly speaking, this is not a form of factoring because it does not carry the service elements of
factoring. Under this arrangement, the factor provides a prepayment to the client against the
purchase of book debts and charges interest for the period. The sales ledger administration and
collection are carried out by the client. The client provides the factor with periodical reports on the
value of unpaid invoices and the ageing schedule of debts
A factoring arrangement which combines the features of non-recourse and advance factoring
arrangements is called Full Factoring or Old Line Factoring. Thus, full factoring provides the
entire spectrum of services – collection, credit protection, sales-ledger administration and short-
Unlike all other types of factoring, in undisclosed factoring customers are not informed about the
arrangements between the factor and the client. The factoring institution maintains the sales ledger
on the basis of the copy of the invoice. It provides the client with either debt default over or
finance or both as desired. The client who makes over payment of each invoice to the factor does
debt collection. The factor keeps a check on its risk by receiving from the client on age-wise
analysis of debts at regular intervals. The types of services, which may be offered under an
undisclosed arrangement, are very flexible. This may be on non-recourse basis and/or seasonal
and/or selective basis.
Bank Participation Factoring
Under this arrangement, a commercial bank participates in the transaction by providing an advance
to the client against the reserves maintained by the factor. For example, assume that a factor has
advanced 80 percent of the value of factored receivables and the commercial bank provides an
advance limited to 50 percent of the factor reserves. The client is required to fund only 10 percent
of the investment in receivables, the balance 90 percent being provided by the factor and the
The mechanics of Cross-border Factoring (also referred to as an international factoring or export
factoring) is similar to domestic factoring except that there are usually four parties to the
transaction – exporter, export factor, import factor and importer. Under this system of factoring
referred to as the two factor system of factoring, the exporter (the client) enters into a factoring
agreement with the export factor domiciled in his country and assigns to him export receivables as
and when they arise. The payment against the factored debts are made exactly in the same way as
under a domestic factoring facility.
If the sale value is denominated in the currency of the importer‟s country, the factor usually covers
the exchange risk associated with the remittances.
The export factor enters into an arrangement with a factor based in the country where the importer
resides (import factor) and contracts out the tasks of credit checking, sales ledgering and collection
for an agreed fee. The debt is usually not assigned to the import factor. The relationship between
the import factor and the importer (the customer) is clarified by a notation on the sales invoice that
the payment is to be made directly to the import factor. The import factor collects the amount from
the customer and remits it to the export factor.
Usually the export and import factors belong to a formal chain of factors with well defined rules
governing the conduct of business between their offices. The credit-rating of the importer and
collection of receivables are carried out by a factor who can speak the language of the importer
(the customer) and who is thoroughly conversant with the business practices and commercial
procedures of the customer‟s country.
PROCESS OF EXPORT FACTORING
1) A1, A2 and A3 Exporter sells goods on open-credit.
2) B Export receivables are factored on a non-recourse basis. The relevant invoices, bills of
lading and other supporting documents are delivered to the export factor.
3) C Export factor carries out the work of credit checking, sales ledger accounting and
collection to the Import Factor with respect to the customers located in the country of
4) D1, D2 and D3 Import factor collects the money due from the customers concerned.
5) E Import factor effects payments to the export factor on assignment or maturity or
collection as per the terms agreed upon between them.
6) F Export factor effects payments to the exporter upon assignment or maturity or collection
depending upon the type of factoring arrangement between them.
FACTORING VIS-Á-VIS BILLS DISCOUNTING
BILL DISCOUNTING FACTORING
1 Individual transaction. 1 Whole turnover basis. This also
gives the client the liberty to draw
desired finance only.
2 Each bill has to be individually 2 A one-time notification is taken
accepted by the drawee. This takes from the customer at the
time. commencement of the facility.
3 Stamp duty is charged on certain 3 No stamp duty is charged on the
usance bills together with bank invoices. No charges other than the
charges. It proves very expensive. usual finance and service charge.
4 More paper work is involved. 4 No such paper work is involved.
5 Grace period for payment is usually 5 Grace period is far more generous.
6 Original documents like MTR, RR, 6 Only copies o such documents are
and Bill of Lading are required to be necessaries.
7 Charges are normally upfront. 7 Only upfront charges. Finance
charges are levied on only the
amount of money withdrawn.
8 It is always with recourse. 8 It can be either with recourse or
9 Only financing facility is available 9 Besides financing, many other
facilities are extended
10 It is reflected on both the sides of 10 It is off-balance sheet financing
FACTORING V/S CASH CREDIT
CASH CREDIT FACTORING
1 Margin retained on receivables are 1 Margin retained on receivables are
usually 40 – 50% usually 20%
2 The drawing power on the basis of 2 Prepayments against invoices are
stock statements is computed once a made as and when they are generated.
month. If invoices are raised between It is like cash sales.
submissions of stock statements, no
money can be drawn against them.
3 The client has to submit various 3 No statements to be given. On the
statements like OIS, I, II & III stock contrary factors furnish various
statements etc to the bank. reports to both the client and the
4 No collection services performed for 4 One of the functions of the factor is
the clients. debt collection.
5 Once a book debt exceeds its usance 5 The factor allows generous grace
period, it is moved from the eligible periods.
6 Higher limits are bifurcated into CC 6 No such bifurcation. The factoring
and DL components account operates like a CC account.
FACTORING VIS-Á-VIS FORFAITING
1 Suitable for transaction with short- 1 Suitable for transaction with
term maturity period. medium-term maturity period
2 It can be with or without recourse. 2 It can be without recourse only.
3 Risk can be transferred to seller. 3 All risk are assumed by the forfaiter.
4 Cost of factoring is usually borne by 4 Cost of forfeiting is borne by the
5 Margin is retained while financing. 5 100% finance is available.
6 Financing depends on the credit 6 Financing depends on the financial
standing of the exporter. standing of the availing bank.
7 Besides financing, many other 7 Only financing facility is available.
facilities are extended.
8 No security against foreign exchange 8 Forfaiter guards against foreign
fluctuation. exchange rate fluctuation for a
9 It can be domestic or export factoring. 9 It is always for export transaction.
MECHANICS OF FORFAITING
A. Promissory notes sent for avalling to the importer‟s bank
B. Avalled notes returned to the importer
C. Avalled notes sent to exporter
D. Avalled notes sold at a discount to a forfaiter on a non-recourse basis
E. Exporter obtains finance
F. Forfaiter holds the notes till maturity or securitizes these notes and sells the
short-term paper either to a group of investors or to investors at large in the
(An aval is an endorsement on the promissory notes by the guaranteeing bank that it
covers any default of payment by the buyer).
CREDIT EVALUATION OF CLIENTS
To assess the creditworthiness of a client, the factor relies on a number of sources. They include:
Credit Rating And Reports
To evaluate the customers of his client, the factor relies primarily on the credit ratings made
available by professional rating agencies like the Dun & Bradstreet (D&B) Inc. in the USA. The
ratings give the user an indication of the estimated size of net worth and a credit appraisal for
companies of a particular size, ranging from “High” to “Limited”.
The composite credit appraisal done by rating agencies takes into account the character, capacity
and the capital of the rated entity. A “High” composite credit appraisal is an indicator of :
(a) sound legal constituency;
(b) track-record of three years or more;
(c) well-balanced management;
(d) no criticized failures;
(e) obligations being retired according to agreements; and
(f) healthy financial position.
In addition to its range service, rating agencies provides credit reports containing a brief history of
the company and its principal officers, the nature of business, certain financial information, and a
track check of suppliers – the length of their experience with the company and whether payments
are prompt. Of course, the quality of the credit reports will vary with the amount of information
available externally and the willingness of the company being checked to co-operate with the
reporter. However, in India, not many such rating agencies are there & hence, above evaluation
process is adopted by factoring companies themselves.
Bank Reports And Trade References
One of the standard means of credit investigation is to seek information from the banker of the
customer in terms of the average cash balances maintained, the loan accommodations sought for
and the commitment and capacity demonstrated by the customer. If the factor is a subsidiary of a
commercial bank, it can get more candid information through this route than if it is not because
banks generally are not willing to share such information with other banks or with their affiliates.
Analysis Of Financial Statements
Financial statements for the most recent period preferably audited ones form an important source
of information for credit analysis. It has been often observed that there is often a correlation
between a firm‟s refusal to provide financial statements and its weak financial position. The factor
usually analyzes the trends in the following ratios to make an assessment of the capacity to pay:
An inter firm comparison or comparison of these ratios with the industry averages can provide
useful insights into the liquidity and profitability of the customer‟s business.
Factor’s Own Experience
If the factor has had prior trading experience with the customer, he can review the trend of credit
taken by the customer and the promptness with which payments were made in the past and relate
the experience to the present assessment.
Client Visit helps to obtain more information about the present trading volumes and future
prospects. This enables the factor to assess if the credit requests are reasonable in relation to the
LEGAL ASPECTS OF FACTORING
The legal relationship between a factor and the client is governed by factoring agreement. Some of
the salient features of the agreement are as follows:
The client gives an undertaking to sell its receivables and the factor agrees to purchase the
same subject to the terms and conditions mentioned in the agreement.
The client warranties that the debts are valid, enforceable, undisputed and recoverable. The
client also undertakes to settle problems of dispute, damage and deductions relating to the
bills assigned to the factor.
The client agrees that the bills purchased by the factor on a non-recourse basis (called
approved bills) will arise only from transactions specifically approved by the factor or
those falling within the credit limits authorized by the factor.
The client agrees to serve a notice of assignment in the prescribed form to all customers
whose receivables have been factored.
The client agrees to provide copies of all invoices, credit notes, etc., relating to the factored
accounts to the factor and to remit money received by the client against the factored
invoices to the client.
The factor acquires the power of attorney to assign the debts further and to draw negotiable
instruments in respect of such debts.
The time frame for the agreement and the mode of termination are specified.
Before factoring the receivables, the factor will require a Letter of Disclaimer from the
bank concerned. The Letter of Disclaimer will indicate that with effect from the date of
letter, the bank will not create a charge against the receivables & will not provide post-sale
finance to avoid the possibility of double-financing the receivables.
As between the factor and the customer, the legal status of the factor is that of an assignee.
The customer whose account has been factored and has been notified of the assignment is
under a legal obligation to remit the money due directly to the factor. Consequently, a
customer who continues to make such payments directly to the client is not discharged
from his obligation to pay the factor until and unless the client remits the amount to the
FACTORING IN INDIA
The development of sound monetary system has been receiving the attention of the Government
and RBI for quite some time. On the basis of the recommendations made by Sukhonoy
Chakravarty Committee and later concretised by Vaghul Committee, the process of
disintermediation and deregulation and establishment of specialised institution was speeded up.
Steps already taken in this direction relate to introduction of new instruments such as certificate of
deposits & commercial paper, removal of ceiling on interest rates on both short term and long term
loans, broad basing of call money markets operations and removal of ceiling on call money rates,
creation of secondary markets and DFHI to facilitate rediscounting of bills and introduction of 182
days treasury bills. To ease the working capital problems arising from delays in payment of bills,
introduction of factoring services was recommended by Vaghul Committee. Later,
KalyanSundaram committee was especially appointed to examine the feasibility of introduction
of factoring services in India. The RBI accepted the committee‟s recommendations that there is
need and scope for factoring.
Banking Regulation Act was amended in July 1990 for this purpose and RBI directed the banks
through the medium of separate subsidiaries to undertake factoring activities. In most of the
developed countries commercial banks have set up their subsidiaries to perform factoring functions
in view of the facts that banks have considerable experience and have easy access to credit
information on both sellers and buyers. Their large network of branches as also availability of
sufficient financial resources provides them additional advantages.
Concept of factoring is comparatively new in India. Till now factoring activity is regulated by
Indian Contract Act, Sale of Goods Act and the Transfer of Property Act. Factoring generates
necessary cash flows against the receivables to the organization. Till now factoring with recourse
option are practiced rather than without recourse factoring. In 1998, only seven companies
provided factoring service and the potentiality of the market was estimated at Rs.4,000 crore in the
RECOMMENDATION OF KALYANSUNDARAM COMMITTEE
As indicated before, the committee constituted by the Reserve Bank of India under the
chairmanship of CS Kalyanasundaram (Kalaynasundaram Committee hereafter) has
recommended promotion of factoring organizations in the country and identified the small-
scale sector and the export sector as the primary target markets (See Appendix 3). Acting
upon the recommendations of the committee, the Reserve Bank of India issued guidelines
permitting commercial banks to start separate subsidiaries for rendering factoring services.
Kalyanasundaram Committee of 1998 has identified that stamp duty on debt, legal status of
factoring etc., is posing a problem to factor markets in India. Stamp duty on debt is
substantial on the debt item and it varies from state to state. In case of multiple factoring
legal priority about payment is not clear.
The committee recommended a centralized registration system to solve this problem. In
case of export factoring also the committee recommends that the responsibility of
repatriation of foreign exchange within the time limit should lie with the exporter in
recourse factoring and with the factor in case of non-recourse factoring.
The committee also recommends that the Civil Procedure code should be consider factored
debt under Order 37 where the defendant is not enjoying the right to defend the suit, which
he can in case of an ordinary suit. The Government/RBI should set-up a legal framework in
this regard. Major players in this sector will be the banks. RBI already permitted them to
operate in this sector but there is a tendency observed among the banks to discourage their
clients to go for factoring probably as it is relatively a new subject for them. NBFCs are
also expecting to come in this market actively. Few players from abroad also may come in
the form of joint venture with top NBFCs.
The pricing of the services offered by the factor is obviously linked to the costs incurred by
the factor. As far as funding is concerned, the factor can consider sources like:
– Public deposit
– Lines of credit from banks and SIDBI
– Rediscounting facility from institutions like Discount and Finance House
– Debt securitization.
The Kalyanasundaram Committee has recommended that the factoring companies can raise
funds from the Discount and Finance House of India and other approved financial
institutions against their usance promissory notes covering receivables factored by them on
the lines of the revised procedure under the Bills Rediscounting Scheme.
In addition to the traditional sources of finance, they proposed the option of funding the
receivables portfolio through the process of securitization. This process, involves issue of
short-term notes against the value of receivables outstanding. The advantage is that the
factoring company creates a short-term source of finance for funding the current asset
which in turn obviates committing a long-term source of finance at a fixed cost to a short-
Since a „recourse receivables portfolio‟ carries a lower degree of risk than a „non-recourse
receivables portfolio‟, the short-term notes can carry differential yields depending upon the
type of receivables backing i.e., a short-term note backed by recourse receivables of a high
credit quality will carry a lower yield than a short-term note backed by non-recourse
receivables of similar quality.
Initially, factoring companies in operation were primarily dependent upon the following
sources of finance:
– Public Deposits
– Lines of Credit from the Sponsoring Bank and SIDBI.
Factoring companies are not treated on par with leasing and hire purchase companies in
terms of their capacity to raise debt, i.e., these companies cannot raise debt to the extent of
ten times their net owned funds. Therefore, the factoring companies are unable to tap the
debt market to the desired extent. For example, these companies cannot raise public
deposits in excess of 25 percent of its paid-up share capital plus free-reserves which is the
norm applicable to manufacturing companies.
As a follow-up to the recommendations of the Kalyansundaram Group, the Banking Regulation act,
1949 was amended to enable commercial Banks to undertake factoring business. In the interest of
banking policy & public, the RBI issued in July 1990 guidelines, as below, to provide a statutory
framework enabling banks to carry on such business.
1. Earlier, banks cannot directly or departmentally undertake factoring business. Whole banks
may invest in factoring companies, with prior approval of RBI, within specified limits, they
cannot act as a promoters of such companies. Banks were permitted to set up separate
subsidiary jointly with other banks, with prior approval of RBI. However, they are
permitted to undertake factoring departmentally also.
2. A factoring subsidiary / joint venture should not engage in financing of other companies or
other factoring companies.
3. Investment of bank in the shares of factoring companies and factoring subsidiary cannot
exceed in the aggregate 10 % of the paid up capital & reserves of the bank.
Current scenario of Indian Factoring Industry is shown in table below :
TURNOVER OF FACTORING IN INDIA (2006)
Number of Factoring companies: 7
Domestic Factoring Turnover (in Millions of EUR): 1450
International Factoring Turnover (in Millions of EUR): 175
Total Factoring Turnover (in Millions of EUR): 1625
RBI initially identified banks region-wise to sponsor subsidiaries & provide factoring to clients in
specified regions :
1. State Bank of India for western zone
2. Canara Bank for Southern zone
3. Punjab National Bank for northern zone and
4. Allahabad Bank for eastern zone
Currently, there are 7 factoring companies in India –
1. Canbank Factors Limited
2. Citibank NA, India
3. Export Credit Guarantee Corporation of India Ltd
4. Foremost Factors Limited
5. Global Trade Finance Limited
6. SBI Factors and Commercial Services Pvt. Ltd.
7. The Hongkong and Shanghai Banking Corporation Ltd.
Some of these players are discussed in brief in next pages.
SBI FACTORS LTD :
SBI Factors, a subsidiary of State Bank Of India, is one of the leading factoring companies
in India with an asset base of Rs 919.36 crores as on March 31, 2007.
It is the first factoring company to be set up in India. It was incorporated in February 1991
and commenced business operations from April 1991.
State Bank of India and its 2 associate banks have a 70% stake in SBI Factors while 20% is
held by Small Industries Development Bank Of India (SIDBI) and 10% by Union bank of
As on March 31, 2007 , it has a market share of approximately 40% in the factoring
Its corporate office is situated in Mumbai ( Nariman Point).
Its branches are in Mumbai (Bandra & Nariman Point), Pune, Baroda, New Delhi,
Coimbatore, Chennai, Hyderabad, Ludhiana, Bangalore.
1. Domestic factoring (with/without-recourse).
2. Export factoring (with recourse).
3. Purchase bill factoring.
4. Factoring of domestic/export bills drawn under LC or bank guarantee.
Key Financial Indicators of SBI Factors :
(Indian Rs. in lacs)
Turnover 148954 365197
Total income 2383 6130
Expenses 1419 4550
Profit before tax 963 1580
Profit after tax 612 1067
Paid-up capital 2500 4500
Reserves & surplus 1781 4118
Debt-Purchase outstanding 51156 102571
Prepayment outstanding 45935 91936
CANBANK FACTORS LTD :
It is a subsidiary of CANARA BANK, a leading Public Sector Bank, reputed for its
diversified and professional services.
It was incorporated in the year 1991, with Small Industries Development Bank of India
(SIDBI) and Andhra Bank as co-promoters as a Non-Banking Financial Company, the
Company is governed by the Regulatory Norms of Reserve Bank of India.
It is one of the leading factoring industry in INDIA , with a Factored Turnover of over
Rs.2592 crores (as on 31st March 2007).
The Chairman & Managing Director and the Executive Director of Canara Bank are the
CHAIRMAN and the VICE CHAIRMAN respectively of the Company.
It is the first factoring Company in India to secure ISO 9001:2000 Certificate by TUV (A
German Agency) for having "established and applied a Quality Management System for
providing factoring services".
The company continues to enjoy the highest rating of "P1+" by CRISIL for its Short Term
Debt Programme of Rs.2500 Million
Branches of Canbank Factors : Ludhiana, Delhi, Mumbai, Pune, Hyderabad, Bangalore,
Chennai, Hosur, Coimbatore.
1. Domestic factoring ( with recourse),
2. Export Factoring ( with recourse),
3. Invoice Discounting backed by LC,
4. Purchase Bill Discounting.
Key Financial Indicators of Canbank Factors :
PERFORMANCE HIGHLIGHTS FOR THE YEAR ENDED (Rs. In Crores)
As on 31/03/2006 As on 31/03/2005 (Growth %)
Factoring Volume 2592.44 2026.38 27.93%
Funds-In-Use 586.36 404.17 45.08%
459.35 324.50 41.56%
Total Income 47.87 40.21 19.05%
Profit Before Tax 19.21 20.66 7.02%
Profit After Tax 13.25 12.57 5.41%
Global Trade Finance Limited (GTF):
GTF commenced its operations in September 2001, as a joint venture between WestLB,
Germany (40%), EXIM Bank (35%) and International Finance Corporation, Washington
(25%), which is the private sector arm of the World Bank.
Effective December 24, 2004, GTF's shareholding is now 40% with Export-Import Bank of
India, 38.5% with First International Merchant Bank, Malta, 12.5% with IFC, Washington
and 9% with Bank of Maharashtra.
GTF is the only factoring company in India to offer online web access to its clients for
accessing their accounts. GTF's "Client Access" module is custom made to suit its
business profile and caters to client requirements.
GTF has reported a turnover of Rs. 28 billion for the financial year 2005-06 (representing
a growth of 47% over turnover of Rs. 19 billion last year) with profit after tax of Rs.
133.3 million (118% higher than last year's profit of Rs. 61.2 million). The value of GTF's
factored assets as on 31st March 2006 was Rs. 7990 million (95% greater than last year's
value of Rs. 4107 million).
Effective 6th December 2005, GTF has converted from a Private Limited Company to a
Public Limited Company.
Credit Rating :The Short Term Borrowing Programme of GTF has been raised from INR
5.0 Bn to INR 7.50 Bn with the highest credit rating from CRISIL (P1+) and ICRA (A1+).
The Long Term Borrowing Programme of GTF has been raised from INR 0.25 Bn to INR
0.30 Bn with a high safety credit rating from CRISIL (AA/Stable) and ICRA (LAA with
GTF is headquartered in Mumbai with four representative offices - one each in New Delhi,
Bangalore, Chennai and Hyderabad.
1. International factoring,
2. Import factoring,
3. Domestic factoring and
Key Financial Indicators of GTF :
( amount in Rs.Mn)
As at March 31, 2004 As at March 31, 2005
Total Turnover 8084 19130
Export Turnover 4367 6432
Profit Before Tax 24 98
FCI (Factors Chain International)
FCI is a global network of leading factoring companies, whose common aim is to facilitate
international trade through factoring and related financial services. FCI's mission is to
become the worldwide standard for international factoring.
FCI helps its members achieve competitive advantage in international trade finance
services through :
A global network of first-class factoring companies
Modern and effective communication systems, to enable them to conduct their businesses
in a cost-efficient way.
A reliable legal framework to protect exporters and importers.
Standard procedures, aimed at maintaining a universal quality .
A package of training programs .
Worldwide promotion aimed at positioning international factoring as the preferred method
of trade finance.
Most factors are either owned by, or associated with, well-known international banking or
other financial institutions as well as insurance companies or industrial organizations.
Factoring has become well established in developing countries, in particular in those that are
highly industrialized. In various Asian countries, the growth of factoring has been dramatic while
in Latin America, financial institutions continue to join the industry. Similar growth has occurred
in Central Europe, the Baltics and the Middle East. Today, almost every industry can profit from
factoring. Textiles and clothing are the most popular but manufacturers of industrial and farm
equipment, office equipment, electronics and processed food are increasingly turning to factoring.
FCI MEMBERS report that more service industries have become clients. There is also plenty of
evidence to suggest that fast-growing, sales-driven organizations appreciate the improved cash
flow, efficiency and profitability that factoring can offer.
The History of Factors Chain International
Established in 1968 as the umbrella organization for independent factoring companies around the
world, FCI has grown into the world's largest factoring network.
When FCI was founded, domestic factoring services were available only in North America and a
few European countries. The concept of international or cross border factoring was still new and
restricted in scope by its lack of geographic coverage.
The founding members of FCI saw the potential for international factoring, but realized that their
umbrella organization was needed for two reasons:
To introduce the concept of factoring in countries where the service was not yet available.
To develop a framework for international factoring that would allow factors in the country
of both the exporter and the importer to work closely together.
The FCI concept is built around local expertise and flexibility of approach. Each country operates
in its own way, being sensitive to local customs and culture adding a unique dimension to cross
border factoring. The important thing however is that each member operates a standard
communication system and agrees to work within a global code of conduct.
Since 1968 FCI has dedicated valuable resources in building the world's largest network of
factoring companies. Currently the FCI network counts 206 factors in 59 countries, actively
engaged in more than half of the world's cross-border factoring volume. Each new member that
joins will have met strict criteria in terms of financial strength and commitment to high standards
The total volume for factoring increased in 2005 by more than 18%. The world total stands now at
Although the above figures indicate that the factoring industry continues to enjoy a double-digit
yearly growth, even more impressive are the growth figures for international factoring, nearly 27%
last year, a consistent pattern for the past years. It illustrates that exporters and importers, around
the world, are becoming more and more familiar with the advantages to be derived from a
factoring arrangement: working capital, credit risk protection and collection service for the
exporter, while the importer benefits from buying on open account terms without the need to open
letters of credit or other payment terms which have a restrictive character.
FCI itself grew to a membership of 206 members (59 countries) and was responsible for 56% of
domestic factoring volumes and for almost 64% of all international factoring volumes. As global
market leader, FCI is the only organisation which has the reach and depth to produce these world
factoring statistics on a yearly basis (See Appendix 4 & 5)
Strong regional growth was seen in Asia, in particular again for Hong Kong (+60%), Taiwan
(+57%), China (+35%) and India (+22%). A remarkable turnaround has come for South Korea,
where international factoring has been reintroduced, this time with a solid emphasis on export
factoring services. The introduction of factoring in Vietnam is in full swing and this promising
market will be of great interest, reflecting Vietnam‟s competitive position vis-à-vis China in
In the Americas, Chile (+126%) was the strongest growing market, followed by Argentina, Mexico
and Brazil, although in Brazil this growth is primarily related to domestic factoring only. In
Europe numerous countries experienced excellent results with perhaps a notable exception for Italy
where the factoring industry further contracted after its peak in 2002.
Other mature factoring markets like Australia and Turkey enjoyed a strong growth as well.
When Mr. Jeroen Kohnstamm, Secretary General of FCI, was asked to explain the reasons for
these primarily positive figures, he listed three elements:
1. a general improvement in world economic conditions, despite high energy prices and high
prices for other raw materials.
2. greater familiarisation in individual markets with the flexible and service oriented character
of factoring, leading to a healthy increase in demand.
3. introduction of factoring in more and more countries, whether it is Peru, Egypt, Ukraine,
the United Arab Emirates or an especially promising market like Vietnam.
Problems & Suggestions
In India, factoring is in the pioneering stage of its life cycle. For this service to enter into
the growth phase, a number of genuine operational problems are to be sorted out. Some of these
problems are mentioned below:
Credit Information :
Factoring companies in India do not have access to any authentic source of information on
the creditworthiness of business firms. Even though there are some organizations like CIBIL
which provide with credit information about SSIs & SMEs, not many are aware of these rating
agencies. In the absence of this information, each factoring company has to establish its own data-
base for evaluating the creditworthiness of its clients‟ customers. To avoid creation of multiple
data-bases with similar information and to evolve a uniform method of reporting on customers‟
credit worthiness, Reserve Bank of India has suggested that all factoring companies can get
together and promote a Credit Information Services Company who can publish black list of
defaulters on regular basis. Banks have access to frequently published IBA Bulletin which
indicates names of unsatisfactory drawee ( in case of Bill of Exchange) & their default rate.
Factoring organizations should also have access to such data.
Stamp Duty :
Under the present legal framework, assignment of debt attracts stamp duty. Since factoring
essentially involves assignment of the client‟s debts to the factor, the transaction attracts stamp
duty thus increasing the cost of the transaction. Factoring companies have appealed to the
government for exempting factoring transactions from the levy of stamp duty like it is exempted
on 90 days BOE backed by LC. In fact, the Kalyanasundaram Committee has also recommended
for waiver of stamp duty on assignment of debt to factors.
Legal Framework :
Changes are also called for in other components of the present legal framework to ensure
success of factoring in India. The changes suggested by the Kalyanasundaram Committee
1) A Prompt Payment Act which requires government, public sector undertakings and
others to pay interest for delays (beyond a specific period) in payment for supplies
made to them.
2) Guidelines for the establishment and the operation of efficient and viable factoring
3) Legislation to the effect that successive assignments of book debts will not have
priority over the first assignment in favor of the factor.
4) Constitution of a statutory body which will register all assignments of book debts
and provide access to this information.
5) Amendment to the Civil Procedure Code to provide for recovery of factored debts
by invoking the summary procedure under Order 37 of the Code. As per this order,
the defendant is not entitled, as a matter of right, to defend the suit, which he can do
in the case of ordinary suits. In fact, it would be better to have a dedicated
legislation which will cover all aspects of factoring.
Factoring being a fund-based facility, the factoring companies must be permitted to have a
debt capacity on par with the other financial intermediaries like the leasing and hire purchase
companies. Factoring companies are presently funding their receivables portfolio primarily
through equity which is not an optimal funding alternative given the cost of equity and the
maturity mismatch (a long-term source of finance being used to fund a short-term asset).
Therefore, guidelines have to be evolved permitting the factoring companies to have a higher
debt capacity and freely tap the long-term market and the money market so that these
companies can design cost-efficient capital structures. So factoring companies must be
encouraged to raise funds through sources like short term capital gain bonds at low interest
rates. Similarly, 90 days or 180 days debentures can be issued by factoring companies to meet
seasonal demand of some clients.
Recovery of Advance :
Currently, factoring companies are not allowed to approach Debt Recovery Tribunal in
case of default by customer. To encourage without recourse factoring in India, access to DRT
must be allowed. Also, Asset Reconstruction Companies may also be permitted to buy debts
from factors for more than 180 days.
Even after 15 years of the life of factoring, the client base for this product is very meagre.
Again one reason for this problem is the lack of awareness among various organizations which
can be very well seen from the analysis shown above thus there is a strong need for effective
advertising /publicizing factoring as a product in comparison to other financial product like Bill
Discounting and Cash Credit like higher participation in seminars held to educate & inform
SSIs & SMEs, creation of customer database by factoring organizations & informing them
about factoring products to convert them as client to increase client base, marketing through
consultants by offering them attractive consultancy fees.
However one could argue the fact that facility such as Bill Discounting/Cash credit were
never advertised or publicised but still they are the most popular financial products today. One
reason for their popularity could be accessibility factor, which means presence of large number
of Banks and Financial institution that provides these facilities. However as far as factoring is
concerned there exists as few as 6 to 7 Financial Institution who are currently offering
factoring facility to the Corporate so to boost this product there is a strong need that
Nationalized banks as well as private institutions should start catering the service of factoring.
Though few foreign banks (HSBC & Citibank) have entered this field, more players must be
invited to increase the competition & improve the efficiency & quality of services to clients.
Main obstacle for factoring is that banks are reluctant for providing factoring services.
They also consider factoring institutions as their competitors. As RBI makes it mandatory for
bank‟s clients to get a LOD (Letters of Disclaimer) from the bank before any proceedings for
factoring, banks resistance create a big obstacles to factoring agencies.
Regulatory Body :
Some regulatory body must be established under RBI control, to manage & direct factoring
organization like we have National Housing Bank for housing finance corporations. Such
regulatory body can promote, support, aid factoring companies. It can provide financial
assistance to such factors in form of loans & advances, subscription to shares, bonds,
debentures, etc. it can also provide credit advisory services.
Unorganized Sector :
There are few agents & brokers in unorganized sector which provides short term finance in
form of cheque discounting, bill discounting, etc at competitive rates. Effective measures
should be taken to handle such issues.
Competitive Rates :
Many of the Corporates felt that the financial charge of 9.5 to 11% would create a dent in
the financial profits because of the interest burden. They also felt that Bills discounting or Cash
credit offering currently at around 8% is a much more feasible option to finance their working
capital requirements. So if factoring is to stand a chance against Bill discounting and Cash
credit it may have to be provided at competitive rates
Multiple Facilities :
Today everyone wants a one-stop shop where they can get multiple facilities under one
roof. The same is the case with organizations. Firms today want that they can get multiple
sources of finance under one roof so that their time and effort is saved. Presently factoring
institutions are allowed to provide only factoring facility. Thus some liberty should be given to
factoring organizations whereby they can provide services like Bill discounting and Cash credit.
Innovative Products :
Factoring Organization can come up with innovative products like distribution financing,
financing of consignment note, rent receivable financing, etc to increase their spectrum of
operation. Also, there is huge scope for improvement in their services like reduction in number
of days required by new client in availing factoring facilities.
Currently, factoring facilities are preferably available to manufacturing & trading concerns.
Spectrum of factorability can be increased to software companies, construction companies
(other than factoring running A/c bills). Though this may involve high risk comparatively, it
can be tackled with tools like work certification, margin reduction, more security & collaterals,
Commitment charges :
Many times, client set up higher limits with factoring companies & don‟t avail this facility. In
such cases commitment charges can be levied by factoring charges like banks.
With the advent of globalization and opening up of Indian economy, financial sector is to
play a pivotal role in the overall economic development of the country. Mergers and acquisitions
are the order of the day for the corporates and gains taking birth to fetch the maximum advantage
of optimum size and economies of scales of production. Big corporates are able to raise ECBs at
cheaper rates. In the process, weaker and smaller SSI Sector suffer from the competition posed by
the big corporates. To enable SSI sector to withstand the competition from big corporates, MNCs
and foreign companies, it is imperative that SSI units manage their collections more efficiently and
professionally. As banks and financial institutions are moving away from traditional lending to
new profitable services, SSI sector is looking for an agency which can offer liberal terms and
sanction facilities expeditiously with speedier collection service. In the light of the above, factoring
is going to play an important role in filling the gap and enable the SSI sector to be competitive and
Factoring and The Economy
The economic significance of factoring stems from the stabilizing influence it will have on
industry and trade. The immediate impact of factoring will be the promotion of efficiency and
profitability of the small and medium sized industrial units, which cannot go to capital market for
their capital requirements for growth or diversification, factoring could also serve as a spring board
for planned growth. Further, Factoring will also promote a prompt payment culture among
industrial and trading units by facilitating the overall acceleration of the receivables turnover. The
impact of this accelerated receivables turnover will be better return on capital because of the
facilitation of greater volume of business on the same amount of capital or the same amount of
business on smaller amount of capital. Thus, such a prompt payment culture prompted by factoring
among industrial land trading units and the resultant overall accelerated receivables turnover will
ultimately have a multiplier effect on production, employment and economic growth.
CHINA – Case study on factoring (2005)
Zhejiang Supor Cookware Co.: A Chinese Success Story
Zhejiang Supor Cookware Co., Ltd. (hereafter referred to as “Supor”), located in Yuhuan, a small
town some 400 kilometres south of Shanghai, has been making cookware since 1988. Today, it
owns the number one cookware brand in China and its products have been exported to the United
States, Europe, Japan, Hong Kong and other places.
With its background of rapid expansion, Supor is increasingly export-oriented. Its Yuhuan plant,
which is designed to manufacture products for the overseas markets, covers an area of 200,000
square meters and employs over 1,500 workers. Its yearly export turnover is increasing at a very
Supor‟s success in international markets did not come easily. Fierce competition and customers‟
reluctance to use letters of credit made it recognize that no matter how good its product quality and
reputation was, success also depended on its ability to offer appropriate payment terms. Therefore,
it developed an aggressive marketing and sales policy, which also offered open account terms to its
overseas buyers. The company had to overcome, however, the difficulties of protecting itself
against the insolvency of its foreign customers. It had to collect its international receivables and
enhance cash flows. Consequently, international factoring became an obvious solution.
Supor first used Bank of China‟s export factoring service in 2002 in order to obtain credit cover on
U.S. importers. It is now using factoring for sales to U.S., U.K. and Hong Kong. Its factored
business volume increased from under USD 3 million in 2002 to over USD 22 million in 2004,
with further expansion being forecasted. Just as Mr. Su, one of the Supor‟s founders and now CEO
puts it, “Factoring not only frees us from the worry of bad debts, but also provides us with
immediate cash to finance future growth. The decision to use a factoring service is definitely
justified.” By offering open account terms and using factoring services, Supor‟s international sales
volume could increase ten times during the past two years. Furthermore, the company launched an
initial public offering (IPO) on 3 August 2004 and was listed on the Shenzhen Stock Exchange on
17 August 2004.
In seeking to exploit fresh international market opportunities, Supor is very confident about the
future. “Having access to credit protection and information on buyers in various countries means
we can plan our production and business strategy more safely and more effectively,” Mr. Su says
with a smile, “Factoring has allowed us to move ahead of our competitors.”
CHILE - Case study on factoring (2004)
Austral Foods: A Visit from the President
Austral Food is a leading Chilean seafood exporter whose success has been enhanced by their use
of international factoring. International factoring has allowed the company to diversify its
business and grow export sales through credit risk mitigation and cash flow enhancement.
Austral Food S.A. was founded in 1998 by two young and energetic entrepreneurs who had the
intention to provide high quality seafood products to the demanding international markets. Their
hard work over the past 5 years was rewarded with a visit from Chile‟s National President, Mr.
Ricardo Lagos, in mid-2003. Mr. Lagos cited Austral Foods as an example of how medium-sized
companies can achieve success through the export of Chilean products. He suggested that other
Chilean companies can achieve similar success when tapping into international markets.
The operations of Austral Foods initially focused on the shipment of salmon and Chilean seabass
to the North American market. However, Austral Foods quickly grew through the diversification
of its product portfolio and is now one of the leading Chilean seafood exporters. The company‟s
products now include, in addition to Chilean seabass and salmon, trout, Whiting, swordfish, black,
golden and red kingclip, elephant fish, smelt, among others. Because of its expanded portfolio of
products, Austral Foods has been able to successfully sell and market to global customers in
countries such as Australia, Spain, France, Brazil and Mexico.
Austral Food employs more than 100 people and had total exports of US$ 6 million during the
2003 year. Their facilities include a brand new wholly owned plant in Santiago de Chile, which
was opened in 2003 after passing a vigorous health inspection required before being allowed to
export product globally.
Mr. Baeza, CEO and one of the company‟s founders said, “Most of Austral Food‟s success is
based on our high quality seafood products and our aggressive marketing and sales policy, which
includes offering open account terms to our international buyers. This means that we require
protection against the insolvency of our foreign customers and a method to collect our
international receivables. Further, finance against our foreign sales is required in order to enhance
cash flow and re-invest in the growing business.”
Austral Foods selected FactorLine, S.A., a Chilean member of Factors Chain International (FCI),
to assist with the risk mitigation, collection, and financing of their foreign accounts
receivable. FactorLine was able to provide all of the required features, thanks to the two-factor
system utilized in cooperation with the correspondents of FCI. Mr. Baeza continues by saying,
“International factoring has provided our company with fantastic support, as it allows us to focus
our efforts on production, marketing and sales rather than buyer credit risk, collection and
SUMMARY OF THE REPORT OF THE STUDY GROUP FOR
EXAMINING INTRODUCTION OF FACTORING SERVICES IN INDIA
1. Purchasers of goods and services are often delaying the payments therefore, resulting in working
capital problems for the suppliers, particularly the smaller ones. RBI has, therefore, taken several
measures to alleviate the difficulties of the suppliers. Banks have, however, not been effective in
implementing these measures because of operational constraints. As the extension of factoring
services was perceived by RBI to be one of the measures which could assist in expediting
collection of dues, it constituted, in January, 1988, a Study Group to examine the feasibility and
mechanics of starting factoring organization (s) in India.
Composition and Terms of Reference
2. The Group headed by Shri C S Kalyanasundaram, former Managing Director of State Bank of
India, comprised senior officials from commercial banks, financial institutions, Government of
India and RBI, as also a senior academic, having extensive knowledge in the fields of banking and
finance. The terms of reference for the study included consideration of need and scope for one or
more factoring organizations in the country, the nature of their constitution, whether they should
be in public, private or joint sector, the changes in legal framework that would be necessary for
promoting factoring business, feasibility of extension of factoring services to exporters and other
matters relating to factoring.
3. The Group constituted a Committee each to look into specific areas of:
a. Demand assessment and feasibility
b. Legal issues and
c. Factoring for exports.
Further, it made extensive references to textbooks and write-ups in periodicals, etc., on the subject.
It also solicited views, on various aspects relating to the subject from bankers, representatives of
trade/industry associations and organizations and others, through written responses to a
comprehensive questionnaire devised by the Group and holding meetings with them at
representative centers in the country. A team, comprising the Chairman, the Convenor and the
Chairman of the committee on export factoring, also visited a few developed countries for
discussing conceptual, practical and legal issues relating to domestic and international factoring.
Concept and Types of Factoring Services
4. The Group gathered that factoring services 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 during 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., 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.,
(i) Full Factoring (ii) Recourse Factoring, (iii) Maturity Factoring, (iv) Advance Factoring, (v)
Undisclosed Factoring, and (vi) Invoice Discounting.
5. So far as international trade is concerned, it is customary to use a two factor system where under
there is an Export Factor and an Import Factor. Under this arrangement, while the Export Factor
will provide financing and other services as required by the exporter, the Import Factor will
undertake the credit assessment of importers, establish credit lines on them wherever possible,
undertake control of receivables and take whatever steps that are necessary to collect outstanding
dues. Recourse factoring, direct export factoring, direct import factoring and back-to-back
factoring are some of the different variations of factoring services available to exporters.
Need for Factoring Services in India and Assessment of Demand Therefor
6. Taking all the relevant aspects into account, the Group believes that there is sufficient scope for
introduction of factoring services in India, which would be complementary to the services
provided by banks. The Group is also of the view that the introduction, of export factoring services
in India would provide an additional facility to exporters.
7. There was sufficient indication from respondents that 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 Factors, while continuing to avail of finance 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.
8. On the export front, it is perceived that there would be a fairly good availment of various
services offered by Export Factors, as the exports from India on non-L/C terms are as much as
about 60% of total exports. Even those exporters who are now able to secure L/Cs may find export
factoring attractive as L/Cs, being transaction oriented, are not ideal for repetitive transactions.
Also, there is growing resistance from overseas buyers to
9. With a view to attaining a balanced dispersal of risks, factors should offer their services to all
industries and all sectors in 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
Pricing of Various Services
10. i. The pricing of various services by factors would depend on various aspects, such as
creditworthiness of the customer, his track record, quality of portfolio, turnover, average size of
invoices, etc. However, the base level would depend on the various costs to be borne by the
factoring organization, the most important element being the cost of
ii. Factors should attempt a mix from among the various sources of funds to keep the cost of funds
as low as possible, in any case not exceeding 13.5% p.a. so that a reasonable spread is available.
Since Factors will be competing with banks in financing receivables, they will have to charge their
clients a rate not higher than that charged by banks.
iii. RBI may consider allowing factoring organizations to raise funds from the Discount and
Finance House of India Ltd. as also other approved financial institutions, against their usance
promissory notes covering receivables factored by them, on the lines of revised procedure under
Bills Rediscounting Scheme.
iv. The Group is of the view that the price for the financing services would be around 16% p.a. and
the aggregate price for all other services may not exceed 2.5% to 3% of the debts filed.
11. i. Different views as regard to the number of factoring organizations, as also who should be
their promoters, were placed before the Group. In the Group‟s opinion, 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.
ii. As regards the coverage of industries/sectors by such organizations, it has been suggested that
initially the organizations may be promoted on a Zonal basis, say, one each for North, East, South
and West. Such an arrangement would obviate the necessity of each organization having an all
India net work.
iii. The Group is also of the view that there are distinct advantages in the banks being 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 on both sellers
and buyers; besides, their large network of branches, as also availability of sufficient financial
resources, would provide additional
advantages to them.
iv. There was divergence of views on whether factoring business should be handled by banks
departmentally or through their subsidiaries. Taking into account various dimensions of the
problem, the Group is of the view that 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.
v. Factoring activities could perhaps be taken up by the proposed Small Industries Development
Bank of India, preferably in association with one or more commercial banks.
Educating Business Community about Factoring
12. Factoring being an entirely new concept, the Group recommends that as and when it is decided
to promote factoring organizations, the business community should first be educated about the
nature and scope of these services and the benefits accruing therefrom. In this regard it perceives
that the branches of banks would serve as a useful medium for extensive dissemination of
Mechanization of Factoring Operations
13. Factors cannot extend their services efficiently, effectively and economically without the
support of computers, as also quick and dependable means of communication. Therefore,
concurrent with consideration of various aspects relating to commencement of factoring operations,
the promoters 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, remittances
and other activities involved in factoring business.
14. 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 of 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 Central
Government and 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, factors may have to rely on such
information on clients/customers as could be collected through banks or other sources,
notwithstanding their limitations.
Linkages between Banks and Factors
15. Since it is envisaged that the suppliers will be able to obtain financial services from both banks
and factoring organizations, it is necessary to provide for proper linkages between banks and
factors. Thus, there should be arrangements whereunder 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 better working capital management, in view of specialized knowledge, skills and
contacts of the Factors. Such collaborative effort could help in prevention of sickness in units.
SSI Units and Factoring
16. SSI units have been facing constraints in their operations on account of inadequacy of working
capital caused by delays in receiving payments for their supplies. A large number of SSI units are
managed by their promoters and/or persons with technical orientation who are unable to pay
continuous attention to the areas of debt collection, accounting and working capital management.
By and large, such units do not have an organizational set-up
and/or expertise in the area of credit management to attend follow-up and recovery of dues from
17. SSI units perceive that Factors, with their systematic, specialized and professional approach,
would be in a position to assist them in debt collection. The credit protection services of Factors
would entitle them to be assured of payment on a fixed date, as also protection against customer‟s
18. As regards financing of receivables, while Factors would provide another source of finance to
SSI units, they cannot be expected to offer finance at concessional rates, as is presently being done
by banks to eligible units. For continued availment of concessional finance, linkage between banks
and Factors is suggested.
19. While the potential demand for factoring services from the SSI sector is estimated to be sizable,
it would take some time before this demand could crystallize. In this connection, the Group
considered the question of reservation of a specific percentage of total business of factoring
organizations for SSI sector, to give an initial boost to factoring for this sector. In its view, this
may not be desirable, especially in the initial stages, as it could endanger the factoring
organizations‟ commercial viability. Moreover, as factoring develops, such reservation may not be
necessary at all.
20. The Group is of the view that factoring for SSI units could prove to be mutually beneficial to
both Factors and SSI units and Factors should make every effort to orient their strategy to
crystallize the potential demand from this sector.
21. 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 concessional rates. For this,
factors, will require finance 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 RBI in detail.
22. 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.
23. Introduction of export factoring in India will 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.
24. 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 the 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 RBI, indicating that when factoring is done on „with recourse‟ basis
only, the exporter will be liable for realization of export 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, RBI may caution the 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.
25. If factoring is introduced in India, factors will need uniform rules to operate in the international
market. It is suggested that India may ratify and accept the Unitroit Convention on International
Factoring. Similarly, it would be beneficial for export factors to join one of the international chains
26. 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 risks involved.
27. Among the various organizations which have been dealing with exporters, banks and ECGC
appear to be more eminently suitable for handling export factoring. The Group is of the view that
besides bank(s) – sponsored 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 RBI
to undertake business of export/import factoring.
28. 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 bank(s) – sponsored
factor would provide all the services, including credit protection, the finance being provided by
29. ECGC has represented that if banks (or their subsidiaries/associates) are also asked to
undertake full-scale export factoring, it will have an adverse impact on the risk portfolio of ECGC;
besides, it would disturb the present insurance arrangement in terms of reasonableness of cost,
flexibility and range of insurance protection. It has, therefore, suggested that ECGC alone may
provide credit protection (to the extent of 100%) and other services excluding finance, may
continue to be provided by bank(s). However, the Group believes that 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 with regard to the factor whose services they
will avail of.
30. In view of its experience, the data bank it has built-up and relationship with agencies/affiliates
abroad, ECGC could start factoring business within a short period, while banks will take a fairly
long time before they commence export 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 challenge from banks, which
would be later entrants.
31. 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 introduction
of export factoring services concurrently with the extension of such services for domestic credit
32. Government of India may consider introducing legislation requiring Government agencies,
public sector undertakings and others to pay interest for delays (beyond a specific period) in
payment for supplies made to them, on the lines of legal framework in some of the countries
abroad and such legislation may also cover factored debts.
33. Indian law does not, at present, comprehensively deal with various aspects involved in
factoring business. As such, it would be necessary to promote special legislation to support the
establishment and operation of efficient and viable factoring organizations.
34. To enable a factor to be in a position to collect the debts in its own right, it must take an
assignment of book debts of clients. Existing provisions of Section 130 of the Transfer of Property
Act, 1882, are quite adequate to protect the interest of the Factor.
35. To make factoring economically viable, it is essential that assignment of book debts in favor of
a factor is exempted from stamp duty. Various States should, therefore, be requested to remit the
stamp duty; since no factoring business is being done currently in the country, remission would not
result in any loss of existing revenue to the States. If, however, complete remission of stamp duty
is not acceptable, assignments up to specified amount or sales from specific sectors, may be
exempted from such duty.
36. Notice of assignment becomes necessary to prevent the debtor paying the debt to the client or a
subsequent assignee and also enable the Factor to claim the payment of debt in its own right. If
stamp duties on assignment are waived, notice of assignment can be given by the factor as soon as
it „approves‟ the debt for factoring; for this purpose, no further statutory support is necessary.
37. As regards priority between successive assignments, it must be provided through specific
legislation that subsequent assignments shall, in no event, have priority over the first assignment in
favor of the factor. A system of filing notice of the agreement between the factor and its client in a
central register to be maintained by an appropriate statutory authority, may also be provided.
38. An influential buyer could insist that the contract with the supplier should contain a stipulation
to the effect that the supplier cannot assign the debts due by the buyer. Hence, it may be provided,
through legislation, that any such stipulation shall be of no effect.
39. To direct development of factoring on healthy lines, there is a need for a system of regulating
the entry of entrepreneurs who would be keen on starting factoring business, prescribing norms
about their minimum capital requirements and extent of deposits which could be raised by them
from the public and for monitoring their operations. In the Group‟s view, RBI would be the
appropriate authority for framing and implementation of the relevant regulations.
40. The Civil Procedure Code may be amended to clarify that the factored debts can be recovered
by resorting to summary procedure under Order 37 of the Code in terms of which the defendant is
not entitled, as of right, to defend the suit, which he can do in the case of ordinary suits. 41. As
financing by factors will attract the provisions of the legislation on money lending in various states,
it will be necessary to persuade the concerned Governments to grant necessary exemptions there
from to factoring organizations.
42. An efficient financial system, like factoring service, can sustain itself on a viable basis only if a
conducive environment is created and fostered. The Study Group, therefore, urges that expeditious
steps may be taken by Government of India to promote legislation, as also to grant appropriate
exemption from and make amendments to the existing Laws, to subserve the objective of
Annexure 4 :- Global Factoring - Annual Volume by Country
Annexure 5:- Global factoring: Relative Importance
Annexure 6: Leading Factoring Companies and Associations
Factors Chain International (FCI)
(Has more than three hundred factoring companies as members and is present in more than
forty countries that cooperate in information and debt recovery)
International Factoring Association
Association of British Factors
BNY Financial Group
Century Business Corporation
Bank of China