India Factoring: the way to get SME credit beyond banks

Sudeb Sarbadhikary - CEO, India Factoring.

Saikat Das

The role of a factoring business is yet to gain ground in India wherein small and medium enterprises (SMEs) struggle to get funding support from banks on concern of asset quality. At a little higher cost of funds, a factoring company can well be the liquidity generator to scoot the SME growth engine.

According to Sudeb Sarbadhikary, chief executive officer, India Factoring - a Mumbai based standalone company, the business volume is increasing for factoring companies even as banks' credit is contracting. SMEs generate the majority of country's (around 75%) employment and they should keep growing with free fund flows.

"SMEs are promoter driven company with limited resources. The challenge is that money is blocked for 6-12 months leading to liquidity stress for them. In FY12, our business volume was at Rs 2,500 crore while we aim to take it to Rs 5,000 crore in FY13. We have around 200 SME clients, which form around 90% of the total kitty. It was around 160 in the previous year," he told in an exclusive interaction.

The year-on-year business growth is on a lower base as the company was started in December, 2009.  There are around 10 factoring companies in India. Canbank Factors and SBI Global Factors are two of the oldest factoring companies in India. As of now, the total size of factoring business volume in India roughly stands at around Rs 17,000 crore, which according to Sarbadhikary, forms around 0.30% of the total banks' credit in the country. 

So, how does it work?

Small businesses sell their products to other big companies, which do not immediately release cash. Meanwhile, the former, with limited wherewithal, require more funds to expand their business. Banks are not so keen to extend credit to them beyond a point.

Here comes the role of a factoring company, which gives 80% of the assignment money upfront at an interest cost in the range of 14-15% per annum to the seller (chargeable on monthly basis). The factor will recover the money from the product buyer after a stipulated period. If the SME client does not repay interest, the factor will deduct it from the rest 20% at the time of final realization.

Typically, business entities with turnover of Rs 20-200 crore avail this form of credit facility. For India Factoring, ticket size is in the range of 2-18 crore.

Does it require any collateral?

"Banks want more collateral against loans. Factoring companies are relatively flexible. If we are satisfied with the quality of the debtors, we then are not hooked into collateral. In the last few years, we have seen SMEs are getting starved of traditional liquidity. In the recent time, a lot of new clients are approaching us," the CEO said.

What suddenly added to factoring demand?

No doubt, it is banks' drying up credit. In the wake of rising bad loans, banks have of late, become very selective about sanctioning SME loans. Other major trigger is the Factoring Bill enacted by the Parliament in January, 2012.

"Factoring bill brought in clarity of assignments. Earlier, we did not have any right to proceed legally against the buyers (on behalf of SMEs) in case of any default. Moreover, we could not expect our clients, who own smaller business entities to pay off the debt. The Bill now empowers us to have the same legal right," Sarbadhikary said.

Following the Factoring Bill, the Reserve Bank of India recently issued guidelines creating a new non-banking finance category christened as NBFC-Factors. This has separated the class from other NBFCs, which have been facing a slew of regulatory issues.

Capital infusion and fund raising

Shareholders of India Factoring include Punjab National Bank (30%), Malta-based FIMBank (49%), Italy-based Banca IFIS (10%), Blend Financial (1%) and employees' ESOP (10%). The current share capital stood at around Rs 150 crore. According to industry sources, shareholders are planning to infuse Rs 350 crore capital in next 2/3 years. In FY12, they will give Rs 50 crore capital support.

Besides, the company is raising bank loans of Rs 1,000 crore on an average every year at different banks' base rates (around 11% average) and thereby earning a spread of around 2/3% at the time of lending.