GLOBAL TRADE FINANCE PVT.

LTD, INDIA

A CASE STUDY
Setting up a Factoring Operation in a Developing Economy

Veena Mankar
Warsaw, Poland
October 23-24, 2003

Global Trade Finance Pvt Ltd

GEARING UP A NEW FACTORING OPERATION

 Understanding the Market & Potential

 The joint venture approach
 Marketing & Product strategies

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 UNDERSTANDING THE MARKET
The Indian Factoring Market 2000

Factoring since 1990

With recourse – predominantly Domestic
2-3 players – No significant growth until 2000
No serious international player until 1999
Stringent regulations
Lack of credit information
Concessional Finance for Exports
Government owned export credit monopoly
LC’s are the norm for international trade

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 General Perception
THIS IS A POOR MARKET FOR FACTORING !!

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 UNDERSTANDING THE MARKET
Indicators of Potential

 Significant SME sector

 Exports > 55% to developed markets
 Significant proportion of “Sell & Forget” products
 Increased global competitiveness – Buyers market
 Necessity for India to grow exports
 Move from LC to open account
 WTO pressure to cut export subsidies
 BIS capital adequacy norms – Stringent bank credit norms

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 INDIA’S EXPORTS BY COUNTRIES
5%

25%
27%

3%

22%
1%
17%

Western Europe North America

Far East Asia Pacific South America Developed 64%
Eastern Europe Rest Of Asia
Africa Medium / High Risk 36%

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 COMPOSITION OF INDIA’S EXPORTS

14%
3% 11%
17%

14%

16%

25%

Agr & Allied Products Chemical Products Engineering goods

Textiles Gems & Jewellery Handicrafts
Others

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 UNDERSTANDING THE MARKET
Why had Factoring Failed in India?

 No product differentiation from Bank finance

 Balance sheet approach – Collateral / With recourse
 Fee / Price premium not justified with “Value add”
 No clear strategic focus or market segmentation (Regional
presence)
 Low technology investment
 Lack of product knowledge/ risks
 Lack of competitive funding services
 “Factoring” viewed as a negative product

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UNDERSTANDING THE MARKET
Competitive Banking Product -Export Bill Discounting

 Concessional Export Finance to Large Priority Clients

 SME – only collateralised lending
 Export Finance Availability for SMEs a myth
 Slow Decision Making
 Export Credit Cover – Restrictive
 Bill Discounting- Penal Interest for any “delay”

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 PRE REQUISITES

Reputed parentage to counter “negative” image

International Player to bring “best practices”
Strong domestic presence for reach and early adoption
Regulatory changes - Desirable
Local market expertise – to adapt to local market
Access to Competitive Funding
Therefore : JV between –
International Bank –WestLB
Indian Financial Institution – Exim Bank Of India

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 WestLB

 One of the leading providers of financial services in Germany

 Total assets of more than €350 billion
 World wide operating universal bank
 AA+ rated by S&P and AAA by Fitch
 Market leader in International forfaiting

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 Exim Bank

 India’s premier export finance institution

 The bank facilitates, promotes and finances exports from
India.

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 IFC

 Private investment banking arm of the world bank

 World’s largest multilateral source of loan and equity
financing for private investment in developing countries
 India is the largest recipient of IFC’s funding

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 VALUE OF IFC (WORLD BANK) AS AN INVESTOR

 Support creation of enabling regulatory environment

 “Balance” between two strong partners
 Term financial support
 Strengthens promoter/board confidence
 Credibility for users
 Small and medium sector expertise

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 THE RIGHT BALANCE – THE JV WAY

 Strategic fit of philosophies

 Clear leadership with one partner
 Shareholders agreement clearly spells out responsibilities
 Control through board – decision making process
 Executive authority – effective delegation
 Risk mitigation – systems and procedures V/s Direct
shareholder control

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 PRE- INCORPORATION INPUTS

Exim Sponsored Feasibility

Product/ Pricing & Competitive Positioning Study
West LB - Risk Policy & Procedures
West LB Evaluated Technology
International Correspondent Relationship Building (FCI/ Coface)

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 BOARD OF DIRECTORS

GTF’s board has 6 directors – of whom 2 are whole time directors

MD of Exim Bank –Non Executive

Chairman of Company

Three Directors (including MD) –

Nominated by WestLB AG

DMD – Nominated by Exim Bank

One Independent Director

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 DECISION MAKING & RISK MANAGEMENT

Board Approved Risk Policy & Procedures

Risk Committees at Board/ Management Level
Combination of Rating and Appraisal System
Evaluation of Performance and Financial Risk
Non Traditional Information Sources
Independent Concurrent Internal Audit Reports to Board
New Product Introduction Process

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 MARKETING STRATEGY

Product Strategy
Market Segmentation – to focus in a large market
Client profile
Value add proposition
Education

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 PRODUCT STRATEGY

Begin with exports –factoring , forfaiting and structured deals

Target SME for regular factoring
Large Corporates – Finance for Growth/ Credit Protection
Add domestic financing products after 1 year with focus on:
Receivables & cash flow control
Existing & New Clients with global competitive ability

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 USP- SERVICE & VALUE ADD

Bank Focus V/s GTF Focus

•Balance Sheet approach to •Cash Flow approach to lending

lending
•Deliver Flexibility & Service
•Deliver Limits and Price
•Without / Limited recourse
•With recourse
•Orders linked growth
•Historical performance
•Quick response on Interim
•Annual Reviews Requests

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 CLIENT PROFILE

Small / Medium / Large

Corporate / Non corporate

Trader / Manufacturer

New / Track record

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 EDUCATION
CREATE AN AWARENESS

Potential Clients
Banks
Complement not compete
 Fee Source
 Improved risk
Training Institutes- Potential Employees
Regulator

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 TARGETING POTENTIAL CLIENTS

Direct
Banks/Financial Institutions
Correspondents ( Reverse Marketing)
Intermediaries

NOT “LAST RESORT” BUT “PREFERRED OPTION”

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 FINANCIAL PERFORMANCE

Rupees Million USD Equiv’ 000

31st March 31st March 31st March 31st March
2003 2002 2003 2002
(12 Mths) (7 Mths) (12 Mths) (7 Mths)
Total Turnover 5000 636 105,272 13,389

Outstanding finance (Net of amount due 1,243 393 26,174 8,274

on collection and for retention)
Gross Income 137.6 33.5 2,897 705

Gross Profit 28 4.9 587 103

Profit Before Tax 21.4 (5.2) 451 (112)

Provision for current and deferred (8.2) 0.6 (173) 13

taxation
Profit After Tax 13.2 (4.6) 278 (99)

(INR 47.50= 1 USD)

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 OFFICES

Head Office – Mumbai (Centralised Operational Activities)

3 Regional Offices ( Primarily for marketing)
Delhi
Bangalore
Chennai

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 GTF - STRENGTHS

 Strong Promoters – Positive Image

 Access to Resources - Ratings – P1+/ A1+ short term
 Robust Systems & Procedures – Int’l Stds
 IT Driven Operations
 Cost Efficient Delivery
 Risk Management
 Multiple Credit Protection Options
 FCI
 Coface
 ECGC
 Trained Staff – Focus on internal Training

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 GOING FORWARD CRITICAL AREAS

Portfolio Growth with Asset Quality

Technology Development
Enhance Service
Improved Risk management
Cost Reduction
Industry Lobby
Market development and education
Train – Make it an attractive career option

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THANK YOU

Global Trade Finance Pvt Ltd