REPORT: FACTORING SERVICES IN INDIA

(In partial fulfilment of covering the course on Management

of Financial Services)

Submitted to:
Prof. Vinay Dutta
FACULTY, FORE SCHOOL OF MANAGEMENT

Submitted By:
Group-8
Kanak Methi (251030)
Saurabh Agarwal (251058)
Akshay Garg (251072)
Pranith Korandla (251104)
Raveena Gupta (10330)

Feb, 2018

TABLE OF CONTENT
Sr. No. Title Page

1 Introduction 3
2 Literature Review 6
3 Income Analysis 7
4 Expenditure Analysis 7
5 Profitability Analysis 8
6 Conclusion 11
Appendix
 INTRODUCTION
The Vaghul Committee, in 1987, envisaged the factoring service mainly from the point of view of small units and
observed that efficient factoring can have an important role in India for SMEs. The Kalyansundram Committee set
up by RBI in 1988 laid emphasis on setting up of independent agencies to provide factoring services. RBI accepted
the findings of the committee and permitted State Bank of India and Canara Bank to start factoring services
through their subsidiaries in 1991. A few more companies like Punjab National Bank, Wipro Finance Ltd.,
Integrated Finance Company Ltd. and Foremost Factors Ltd. also entered into the business later

Factoring is a financial option for the management of receivables. In simple definition, it is the conversion of credit
sales into cash. In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and
pays up to 80% (rarely up to 90%) of the amount immediately on agreement. Factoring company pays the
remaining amount (Balance 20%-finance cost-operating cost) to the client when the customer pays the debt. Either
the factor or the client depending upon the type of factoring does collection of debt from the customer. The account
receivable in factoring can be for either a product or service. Examples are factoring against goods purchased,
factoring for construction services (usually for government contracts where the government body is capable of
paying back the debt in the stipulated period of factoring. Contractors submit invoices to get cash instantly),
factoring against medical insurance etc.

Characteristics of Factoring

 Factoring is a method of off balance sheet financing.

 Usually the period for factoring is 90 to 150 days. Some factoring companies allow even more than 150
days.
 Cost of factoring=finance cost + operating cost. Factoring cost vary according to the transaction size,
financial strength of the customer etc. The cost of factoring varies from 1.5% to 3% per month depending
upon the financial strength of the client's customer.
 Factoring receivables is an ideal financial solution for new and emerging firms without strong financials.
This is because credit worthiness is evaluated based on the financial strength of the customer (debtor).
Hence, these companies can leverage on the financial strength of their customers.
 Credit rating is not mandatory. However, the factoring companies usually carry out credit risk analysis
before entering into the agreement.

Objectives of the Study

 To know the concept of Factoring, its characteristics and benefits
 To know the role of Factoring in Indian SMEs
 To undertake the financial analysis of SBI Global Factors
 To compare the financial performance of SBI Global Factors with IFCI Factors

Methodology
The present study is an analytical study and requires mainly secondary data. Secondary data is collected from
various websites, publications of Journals, research publications and annual reports of the companies. The financial
performance analysis carried for the period 2013-14 to 2016-17. The data has been taken from the annual reports of
SBI Global Factors and IFCI Factors. The financial performance has been reviewed by undertaking income
analysis, expenditure analysis and profitability analysis of the selected companies. The income analysis includes
operating income to total income and non-operating income to total income. The expenditure analysis includes
operating expenses to total expenses, non-operating expenses to total expenses and personnel expenses to total
expenses. Profitability analysis has been done on the basis of various ratios like return on assets, return on equity,
dividend per share, earning per share, expense ratio, equity dividend coverage ratio and net profit ratio. The
presentation of the data analyzed has been made in the form of tables and the relevant conclusions have been
drawn.
 LITERATURE REVIEW

Government of India enacted the Factoring Act, 2011 to bring in the much-needed legal framework for the
factoring business in the country. It has provided definitions for the terms factoring, factor, receivables and
assignment. The Act also specifies that any entity conducting factoring business would need to be registered with
RBI as NBFCs; while exempting banks, government companies and corporations established under an Act of
Parliament, from the requirement of registration with RBI for conducting factoring business. The Act, thus, gave
clarity to the activity of assignment of receivables and also granted exemption from stamp duty on documents
executed for the purpose of assignment of receivables in favor of Factors thereby making the business more viable.

Madan, Isha. (2017) talk about the financial challenges faced by Small Entrepreneurs. To implement the innovative
ideas, entrepreneurs need to have a strong technical, financial and other support. Big entrepreneurs are able to
manage all the above-mentioned resources but small entrepreneurs have to face a number of obstacles in the startup
stage. Finance is the life blood of an organization and no organization can function properly in the absence of
adequate funds. The major cause of this problem is insufficient capital and inadequate availability of credit
facilities. The small entrepreneurs are struggling with the problems of weak economic base and low credit
worthiness. According to Chavali, Kavita (2012), The biggest problem for small business houses is the delayed
payments from their customers (large corporate) which results in liquidity crunch. Despite the availability of
various means of financing, MSMEs are unable to get credit, owing to the lack of collateral and lack of proper
maintenance of financial records that are scrutinized by banks. In such a scenario, factoring services have the
potential to emerge as a relief provider to the entrepreneur and also as a means for raising working capital.

Aşir, Emel (2017) talk about the Ranking of Factoring Companies in Accordance with ARAS and COPRAS
Methods. With the development of International trade, Financing techniques have also begun to play a role. It
also helps a country in ease of doing business and improvement in world ranking by the means of factoring
capacity in the recent years. With this emphasis on factoring transactions has increased. Factoring is equally
important in both domestic and international financing of trade. Selection of factoring company that is equally
compliant as per management structure also becomes equally important. There are various ratios that are used in
assessment of proper factoring companies.

In its policy paper, SIDBI (Small Industries Development Bank of India) says Factoring is one of the important
mechanisms to address the MSME sector’s issues of resource constraints, delayed payment and receivable
management. Although, over the past two decades, factoring has emerged as an important means of financing,
especially in the developed economies, the same is yet to realize its potential in developing countries like India
where it forms only a small fraction of the total bank credit. The study attempts at mapping of issues faced by
MSMEs in raising credit along with the current status of factoring in India vis-à-vis other countries.
Factoring
Factoring is defined as “an outright purchase of credit approved accounts receivables, with the factor assuming bad
debt losses.

The modern factoring involves a continuing arrangement under which a financing institution assumes the credit
control/protection 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 relates to such accounts receivables and performs other auxiliary functions.

Factoring is an asset based method of financing as well as specialized service being the purchase of book debts of a
company by the factor, thus realizing the capital tied up in accounts receivables and providing financial
accommodation to the company. The book debts are assigned to the factor who collects them when due for which
he charges an amount as discount or rebate deducted from the bills. Thus, the factor is an intermediary between the
supplier and customers who performs financing and debt collection services.

In a situation where industry is finding it difficult to obtain funds, the need for better management of book debts by
companies had arisen. In this backdrop, ‘factoring’ services assumed an important role in global business and could
help Indian industry overcome debt collection deficiencies in a big way. The Managing Director of International
Factors Ltd., of Singapore Mr. Eugem Tan Eu Jin, noted that “factoring business had a great potential in India and
it was in the best interests of the country to develop this financial intermediary. Banks and other financial
institutions can as well diversify in this area to increase their profitability.”

Types of Factoring
1. Recourse factoring
Recourse factoring is the most common choice offered by factors. In fact, about 80 percent of factoring
companies make this choice available to customers. Simply put, this arrangement gives your factor recourse to
demand payment from you if one of your invoice clients fails to pay its invoice.

In most cases, you must pay back the defaulted invoice within 60 to 120 days. Your client may refuse to pay
the obligation because of a dispute, declaring bankruptcy, or another circumstance. Regardless, with recourse
factoring, you will be expected to pay back the amount of money your factor advanced to you for that particular
invoice.

Who Should Use Recourse Factoring?

Recourse factoring can be ideal if you:

 Have creditworthy invoice clients

 Want to avoid paying higher fees like those that come with non-recourse factoring
 Want to sell your invoices at the lowest discount
 Want to receive the most cash possible for your invoices
 Can pay back or have other invoices to exchange in case of a default

While non-recourse factoring would protect you from paying back defaulted invoices, it also costs you more,
leaving you with less cash for your business. When you want to get the most money out of your invoices, even
with the slight risk of one of your client's defaulting, recourse factoring may suit your purposes.

Who Benefits the Most with Recourse Factoring?

 Given the fact that you pay smaller factor fees and receive the most money possible for your invoices, it would
stand to reason that you would benefit the most with recourse factoring. You get cash quickly to use however
you choose for your business and in return pay minimal fees to your factor.

However, your factor also stands to benefit from recourse factoring in that it assumes a minimal risk to its own
bottom line. Even if one of your clients defaults on an invoice payment, your factor can instead recoup its
money by demanding payment from you. With that, recourse factoring remains popular with both sellers and
factors because of the benefits available to both parties.

What Are the Advantages and Disadvantages of Recourse Factoring?

Like any financial transaction, recourse factoring comes with distinct advantages and disadvantages. Its
benefits include:

 More affordable costs than non-recourse factoring

 Faster approval process
 More cash back for invoices
 Factor performs credit check and payment history verification of invoice clients to minimize risk of
defaults

Despite the advantages, recourse factoring is not without a few notable disadvantages to you as an invoice
seller. The downsides include:

 Factor having recourse to demand payment from you in case of defaulting

 Having your business' income and bank accounts garnished if you cannot pay back the default promptly
or offer another invoice of equal or greater value in exchange
 Less stringent credit check is done on invoice clients than with non-recourse factoring due to the factor
taking on less risk and having recourse for payment.

These pros and cons should come to mind when you are deciding whether or not to pursue this type of business
financing.

Recourse factoring continues to be one of the most popular factoring choices available to small business
owners. You can decide if it is right for you by knowing its advantages and disadvantages.

2. Non-Recourse Factoring
Non-recourse factoring is a type factoring facility in which the factoring company assumes the risk of non-
payment if the customer does not pay the invoice due to an insolvency during the factoring period.

The insolvency must happen during the factoring period, which is the 90-day period that starts when the factor
purchases the invoice. If the insolvency happens after those 90 days, your company will usually not have the
credit protection.

Also, most factoring contracts define the term “insolvency” as a declared bankruptcy. This definition is very
important, because a company could be unable to pay invoices without declaring bankruptcy. There are
factoring companies that offer more flexible non-recourse plans. Some go as far as assuming the risk of non-
payment for ant credit event, bankruptcy or not. If you are looking for a non-recourse plan, be sure to
understand how each factor offers their plans.

How does it work?

 In most factoring transactions, the invoice is purchase in two instalments. The first instalment – called the
advance – covers about 85% of the invoice and is deposited to your account once the invoice is factored. The
second instalment, often called the rebate, covers the remaining 20%, less the finance fee. This settles a
transaction.

Non-recourse factoring only offers payment protection for the advance portion of the transaction. If the invoice
defaults, you do not have to return the advance to the factoring company. You get to keep the funds while the
factor absorbs the loss. However, since the invoice is never paid by the customer, the second instalment is
never provided. This last point is key in understanding how this solution works (learn more).

No protection against client disputes

A non-recourse program does not offer any protection whatsoever against product or service disputes, late
payments or payment disputes. For example, a non-recourse plan would not protect you if your customer:

 Is unhappy with the quality of your product/work and withholds payment

 Delays a payment or changes payment terms
 Disputes the amount of the invoice and short pays
 Decides not to pay you (other than due to insolvency or credit issues)

Why is non-recourse factoring useful?

A non-recourse plan is useful because it helps limit your bad debt in two ways. The obvious way is that you
will not be liable for the advance if a factored invoice defaults.

However, it limits your exposure to bad debt by helping you determine if you should offer terms to certain
customers. The factor can do an exhaustive credit review and provide guidance on whether a customer is likely
to pay on time or default. Customers that don’t have good credit can be asked to pay in advance or through a
secure method.

3. Disclosed Factoring

The factoring in which the factor’s name is indicated in the invoice by the supplier of the goods or services
asking the purchaser to pay the factor, is called disclosed factoring.

4. Undisclosed Factoring

Undisclosed factoring, also referred to as non-notification factoring, is specific in that the customer is not
notified about the receivables being pre-financed by the factoring company. In this form of factoring financing,
there is not the usual requirement for customers notification about the assignment of the receivables to the
factoring company and for customers consent with the assignment.

Undisclosed factoring is based on various legal and organizational procedures. One of the advantages is that the
bank account to which the customer makes payments is, in formal terms, an account of the client, not an
account of the factoring company.

Who is it for?

Given the above, undisclosed factoring is a good option for customers who do not allow factoring or where it is
not, for business reasons, advisable to inform the customer about the client using the services of a factoring
company.
 On the other hand, this form of factoring financing is only feasible for receivables from sufficiently strong and
creditworthy customers, such as chain retailers or multi-national companies or in the automobile industry.
Additionally, undisclosed factoring requires superior creditworthiness of the supplier – client of the factoring
company.

5. Advance Factoring

Advance factoring can be with or without recourse. Under this arrangement, the Factor provides advance at an
agreed rate of interest to the client on uncollected and non-due receivables. However, not the entire amount is
paid in advance, but a certain percentage of the receivables is paid in advance. The balance amount is paid on
the guaranteed payment date. The held back amount is the margin ranging from 5% to 25% which is paid post
realization of money from the customers. The factor collects the agreed rate of interest for advance payment
made to the business considering the short-term rate, turnover, financial standing of the business, etc. This is
only a pre-payment and not an advance.

Under this method, the customer is not notified about the arrangement between the client and the Factor. Hence
the buyer is unaware of factoring arrangement. Debt collection is organized by the client who makes payment
of each invoice to the Factor, if advance payment had been received earlier.

6. Maturity Factoring
Maturity factoring, also known as collection factoring is a type of factoring service in which the client sells his
invoice to the factor and in return, the factor pays the client for such invoices either on the date of maturity or
any date after the date of maturity. In this factoring arrangement, the factor does not pay the client any money
in advance. For example, an invoice maturing on 25th August, 2016 shall be either paid off 25th August 2016
or any other date after maturity decided between the client and the factor.

Advance vs Recourse Factoring

Under advance factoring, the factor provides the client with pre-advance on uncollected and non-due receivable
at a particular rate of interest. This can also be termed as financing facility. On the other hand, maturity
factoring is an arrangement where the factor provides the client with payment of the account receivables at the
end of collection period or on the day of collection of receivables, whichever is earlier.

7. Conventional or full factoring

Under this system the factor performs almost all services of collection of receivables, maintenance of sales
ledger, credit collection, credit control and credit insurance. The factor also fixes up a draw limit based on the
bills outstanding maturity wise and takes the corresponding risk of default or credit risk and the factor will have
claims on the debtors also the client creditor. It is also known as Old Line Factoring. Factoring agencies like
SBI Factors are doing full factoring for good companies with recourse.

8. Domestic Factoring
In the domestic factoring, the three parties involved namely customers (buyer), client (seller supplier) and
factor (financial intermediary) are domiciled in the same country. The mechanics pf such factoring deal is
outlined in the preceding discussion reacting to different types of factoring.

9. Export Factoring
The process of export factoring is almost similar to domestic factoring except in respect of the parties involved.
While in domestic factoring three parties are involved, there are usually four parties to a cross border factoring
transaction. They are:

(1) exporter (client)

(2) importer (customer)

(3) export factor

(4) import factor

Since two factors are involved in the deal, international factoring is also called two-factor system of factoring.

The two factor system results in two separate but inter-linked agreements:

(1) between the exporter (client) and the export factor

(2) between the export factor and the import factor

Usually, the export and the import factors belong to a formal chain of factors with well-defined rules governing
the conduct of business. Otherwise, they evolve an ad hoc relationship to conduct specific transactions. The
import factor a link between export factor and the importer and serves to solve the international barriers like
language problems, legal formalities and so on. He also underwrites customer trade credit risk, collects
receivables and transfers funds to the export factor in the currency of the invoice. The flow of documents and
information between the parties involved in cross border factoring takes the following shape:

1. The exporter informs the export factor about the export of goods to a particular import client domiciled in a
specified country. The goods are sold on open credit

2. The export factor writes to import factor (domiciled in the country of the importer) enquiring about the
credit worthiness, reputation etc of the importer.

3. On getting satisfactory information on the import factor, the exporter delivers the goods to the importer and
the relevant invoices, bills of lading and other supporting documents are delivered to the export factor. The
export receivables on a non recourse basis are factored.

4. The export factor farms/contracts out the work of credit checking sales ledgering ad collection to the import
factor with respect to the customers located in the country of imports.

5. The import factor collects the payment from the importer (customer) and effects payment to the export
factor on assignment/maturity/ collection as per the terms of assignment in the currency of the invoice.

6. Finally, the export factor makes payment to the exporter up on assignment or maturity or collection
depending upon the type of factoring arrangement between them.

International factoring provides a non-course factoring deal. The clients (exporters) have cent percent
protection against bad debt loss on credit approved sales. The factors take requisite assistance and avail
facilities provided in the exporting country for export promotion. They handle exporter’s overseas sales on
credit terms. In fact, the factor becomes the sole debtor to the exporter once documentation is complete and
goods have been shipped.
Types of Export Factoring

The following are the important types of International Factoring. The client can choose any type of
international factoring depending upon exporter - client needs and his price bearing capacity.

Two Factor Systems

This is the most common system of international factoring and involves four parties i.e., Exporter, Importer,
Export Factor in exporter's country and Import Factor in Importer's country.

The functions of the export Factor are:

i. Assessment of the financial strength of the exporter

ii. Prepayment to the exporter

iii. Follow-up with the Import Factor

iv. Sharing of commission with the import Factor

The functions of the Import Factor are:

i. Maintaining the books of the exporter in respect of sales to the debtors in his country

ii. Collection of debts from the importer and remitting the proceeds to the exporter's Factor

iii. Providing credit protection in case of financial inability on the part of any of the debtors

1. Single / Direct Factoring System

In this system, a special agreement is signed between two Factoring companies for single Factoring. Whereas
in Two Factor System, credit is provided by import Factor and pre-payment, book keeping and collection
responsibilities remain with export Factor.

For this system to be effective there should be strong co-ordination and co-operation between two Factoring
companies. Pricing is lower when compared to Two Factor System.

2. Direct Export Factoring

Here only one Factoring company is involved, i.e., export Factor, which provides all services including finance
to the exporter.

3. Direct Import Factoring

Under this system, the seller chooses to work directly with Factor of the importing country. The Factoring
agreement is executed between the exporter and the import Factor. The import Factor is responsible for sales
ledger administration, collection of debts and providing bad debt protection up to the agreed level of risk cover.

4. Back to Back Factoring

It is a very specialized form of International Factoring, used when suppliers are selling large volumes to a few
debtors for which it is difficult to cover the credit risk in Interna-tional Factoring.
 In this case, International Factor can sign a domestic Factoring agreement with the debtor whereby it will be
getting the receivables as security for the credit risk taken in favour of Export Factor.

How Factoring works?

Factoring vs Bill Discounting
Definition of Bill Discounting
Bill Discounting is a process of trading or selling the bill of exchange to the bank or financial institution before it
gets matured, at a price which is less than its par value. The discount on the bill of exchange will be based on the
remaining time for its maturity and the risk involved in it.

First of all the bank satisfies himself regarding the credibility of the drawer, before advancing money. Having
satisfied with the creditworthiness of the drawer, the bank will grant money after deducting the discounting charges
or interest. When the bank purchases the bill for the customer, it becomes the owner of the respective bills. If the
customer delays the payment, then he has to pay interest as per prescribed rates.

Further, if the customer defaults payment of the bills, then the borrower shall be liable for the same as well as the
bank can exercise Pawnee’s rights over the goods supplied to the customer by the borrower.

Definition of Factoring
Factoring is a transaction in which the client or borrower sells its book debts to the factor (financial institution) at a
discount. Having purchased the receivables the factor finances, money to them after deducting the following:

 An appropriate margin (reserve)

 Interest charges for the financial services
 Commission charges for the supplementary services.

Now, the client forwards the collection from the customer to the financial institution or he gives the instruction to
forward the payment directly to the factor and settles the balance dues. The bank provides the following services to
the client: Credit Investigation, Debtors Ledger Maintenance, Collection of Debts, Credit Reports on Debtors and
so on.

BASIS FOR
BILL DISCOUNTING FACTORING
COMPARISON

Meaning Trading the bill before it becomes A financial transaction in which the
due for payment at a price less business organization sells its book
than its face value is known as debts to the financial institution at a
Bill Discounting. discount is known as Factoring.

Arrangement The entire bill is discounted and
paid, when the transaction takes
place.
The factor gives maximum part of
the amount as advance when the
transaction takes place and the
remaining amount at the time of
settlement.

Parties Drawer, Drawee and Payee Factor, Debtor and Client

Type Recourse only Recourse and Non Recourse

Governing statute The Negotiable Instrument Act, No such specific act.

1881
 BASIS FOR
BILL DISCOUNTING FACTORING
COMPARISON

Financier's Income Discounting Charges or interest Financier gets interest for financial
services and commission for other
allied services.

Assignment of No Yes
Debts

Factoring versus a Traditional Bank Loan

Factoring, or “accounts receivable financing,” is a quick, flexible way for businesses to build up their cash flow.
Here is how factoring differs from a bank business loan or line of credit:

Factoring Bank Loan

The amount of money you can finance The money you borrow comes with a cap or
grows as your receivables grow. a limit.
Factoring is not a loan. You assume no debt. You repay principal and interest on your
loan.
You can qualify for factoring regardless of Qualifying for a loan requires a review of
your credit score; most factors are more your company’s financials, assets and
concerned with your customers’ credit liabilities, and credit history.
strength.
It can take less than five days to set up an Securing a loan or line of credit takes
account. between one and two months.
Funding can take place within 24 hours. Once your loan is approved, you have
immediate access to those funds.
Minimal paperwork and documentation are Extensive paperwork, financial statements
required to start factoring. and personal information are required.
Some factors handle collections of your No accounts receivable or back office
accounts receivable and provide additional services are provided.
back-office services.
Rates can be adjusted as you finance more Your annual percentage rate is locked long-
money through factoring. term, or for the life of the loan.
Some factors provide credit reports and No credit services provided, which means
other information on your existing and you manage your own credit policy.
potential customers.

Factoring vs Forfaiting

Factoring Forfaiting
Factoring is used in both domestic and Forfaiting is only used in international trade
international trade financing
Letters of credit are not involved in Letter of credit are part of the forfaiting
factoring process
Factoring generally only provides 80 to 90
percent of the amount of the accounts
receivable
Factoring involves accounts receivables
Forfaiting can provide up to 100 percent of
the amount of the invoices
Forfaiting deals with negotiable instruments
(such as bills of lading, promissory notes,
etc.)

Benefits to sellers
 Time value for money: An NBFC-Factor undertakes a transaction based on the quality of the receivables,
unlike banks which take credit decisions based on a customer's financial history/strength, cash flow and
collateral.
Empirically, once a relationship has been established, Factoring companies are able to turn around a
funding proposal within days as compared with weeks taken by banks in general.
 Can sell on open account terms: Factoring facilitates sales on open account terms and makes funds
available to the seller against sales in domestic and international markets. The buyer is saved from the
cumbersome process of opening LCs and seller is saved from the cost of LCs (which buyer generally passes
on to him under LC transaction).
 Improved cash flow: SBIGFL's services enable its clients (the Seller) to receive the funds almost
immediately after shipment instead of waiting until the payment dates agreed with the buyer.
 Expansion of clientele: Increased liquidity enables the Seller to increase his client base.
 Competitive and flexible interest rates: Generally, Medium Enterprises with weak financial ratings are
not able to bargain for better interest rates from Banks / FIs. If a Small & Medium Enterprise (SME) is
supplying to Big corporates / Mid Corporates, SBIGFL considers the ratings of these corporates and can
offer finer interest rates to these SMEs.
A unique feature of SBIGFL's services is its ability to quote differential pricing for different debtors based
on the risk profiles of each debtor.
 Minimum security /collateral: SBIGFL's facility is flexible and directly linked to client's sales and the
quality of the buyer.
 Collection and follow up: SBIGFL provides follow up services for collection of receivables due to its
clients. Clients benefit by quicker collection of factored invoices.
 MIS: SBIGFL provides its clients a variety of MIS reports on their account position as and when required.
Clients also have online access to their accounts via a web based solution provided by SBIGFL.
 Complementary to working capital limits: SBIGFL's facilities do not affect the existing banking
relationship of the client. SBIGFL complements and does not compete with the working capital bankers.
Proceeds of all factored invoices are credited to client's cash credit account with principal working capital
bank.
 Choice of currency: SBIGFL gives the option to its export factoring clients to avail funding either in
EURO, USD, GBP or INR.
 Better negotiating power: Factoring with its flexible payment option places the seller on a strong footing
to negotiate increased business volumes.

Benefits to buyers
 Uninterrupted supplies to the buyer: Availability of Factoring to the Client (Seller) ensures continuous
supplies to the buyer for his uninterrupted production. The buyer need not go through the cumbersome
process of opening LCs or incur additional costs for the same.
 Automatic revolving line: Factoring limit sanctioned in respect of every buyer gets automatically renewed
on receipt of payment from the buyer on the due date. Thus, it is a revolving facility and can be turned
around 4-6 times in a year.
 Better cash flow management: Buyer gets the benefit of extended credit period which facilitates a smooth
cash flow management.
 Strengthened buyer-seller relationship: The flexible mode of cash availability offered by SBIGFL
against receivables eases the liquidity position, boosts up the purchasing power and thus strengthened the
relationship between the buyer and seller.
Quality buyers with strong financials can rope in their various sellers (who are small players in the market)
and arrange for them Vendor Factoring Facility.
 Flexible purchase terms: Seller’s improved cash flow puts him on a stronger footing to offer better terms
of trade to the buyer.
 FINANCIAL ANALYSIS OF SBI GLOBAL FACTORS

Income Analysis
Income analysis of SBI Global Factors is done on the basis of their revenues and EBIT Margin year on year. The
past four years data has been taken for both the companies and compared with each other. EBIT margin is one the
most important ratios in the income analysis. This is obtained by dividing the operating profit from Revenue. This
ratio tells us about the percentage of revenue the company is generating from its core operations.

Table1: Revenue and EBIT margin of SBI Global factors and IFCI factors ltd.

Components Revenue (Rs. Lakhs) EBIT Margin

Year SBI Global IFCI Factors SBI Global IFCI Factors
2013-14 12530 14215.2 11.47% 29.79%
2014-15 9855 10565.7 -29.08% -17.05%
2015-16 9711 9092.4 42.23% 1.65%
2016-17 10974 8310.5 42.35% 16.97%
Mean 10767.5 10545.9 0.167 0.0784

Table:1 shows the Revenue, EBIT Margin and their mean for SBI factors and IFCI factors over the years. It can be
observed initially both the companies seem to struggle in maintain a stable EBIT margin. But for the past two
years, SBI managed to achieve it at 42.35%. In the year 2014-15, both the companies reported a negative EBIT
Margin owing to high employee expenses and office and administrative expenses in case of IFCI and bad debts
written off in case of SBI.

Expenditure analysis
Although IFCI has improved in terms of bottom line, it can be seen that the turnover has decreased substantially in
the region of over 40%. Considering the macro economic situation, the loss in revenue seems to be a major
deterrent going forward.
Below is the table that shows how SBI global and IFCI factors differ on their expenditure breakups in percentage
terms.

As one can observe, the SBI Global had increased operational expenses in the last fiscal year leading to reduced
operating margins. In the initial years of the tabulation, both SBI Global & IFCI had significant exposure to foreign
exchange exposure in terms of their expenditure but both of them gradually reduced their exposure over the years.
Bad loans surged in the year 2015-16 leading to increase in the non-operating expenses and the improper recovery
of bad loans leading to higher provisions and write offs from the books of the company.
Although the company has reassured its shareholders that stringent practices have been employed currently for
availing corporate loans, it is yet to see how the company will turn back in the coming quarters with low operating
margins and higher NPA pressure from firms like Amtek Group.

Profitability Analysis

Profitability is very important for an organization today. Investors need return for money invested in the business.
It is very important for an organization to earn profits in order to give continuous return to shareholders and other
investors. Profitability of SBI Global Factors and IFCI Factors have been analyzed using Net Profit Ratio, Return
on Assets, Return on Equity, dividend per share, Earnings per share and Expense ratio.
Net Profit ratio is the ratio of net profits to net sales. It reveals the remaining profit after all the costs of production,
administration and financing have been deducted from sales and income tax recognized.
Return on Assets measures profitability in terms of relationship between net profits and assets employed to earn
that profits. This ratio measures return of the firm in terms of assets employed in the firm.
Return on Equity gives percentage return generated to equity shareholders. This ratio reveals how profitably
owner’s funds have been utilized or invested by the firm.
Earnings per share are calculated by dividing the net profit available to equity shareholders divided by the number
of equity shares outstanding.

Table 2: Net Profit Ratio and Expense ratio of SBI Global Factors and IFCI Factors (In percentage)
Table 2 shows mean value of net profit ratio of IFCI Factors (-2.165%) was higher than SBI Global factors (-
22.643%) during the period of 2013-14 to 2016-17. SBI global factors had a very high negative net profit ratio for
two financial years from 2013-14 to 2014-15. However the company was able to recover from negative
profitability position, while in case of IFCI Factors the company had a negative net profit ratio for all the four
financial years although its net profit ratio was negative to a lower extent as compared to that of SBI Global
Factors. Negative net profit ratio means that company faced losses in that financial year.

This table also shows the mean expense ratio of SBI Global factors and IFCI Factors. It can be observed that
expense ratio of both the companies was in range of 0.7 to 1. In addition to it the expense ratio of SBI Global
Factors was higher in all the four financial years as compared to IFCI Factors. This shows that operating expenses
of SBI Factors were very high as relative to their assets.

Table 3: Return on Assets and Return on Equity of SBI Global Factors and IFCI Factors (In percentage)

Table 3 depicts the mean of return of Assets of SBI Global factors was higher as compared to IFCI Factors,
however the mean of return of Assets of both the companies was negative during the period of 2013-14 to 2016-17.
SBI Global Factors had a positive return on assets for two financial years while IFCI factors observed a negative
return of assets continuously for four financial years. As ROA is an indicator of profitability of the company
relative to it total assets we can say that SBI Factors has generated some earnings by using its assets in last two
financial years taken for analysis.
The mean of return on Equity was higher in case of SBI Global Factors though it was negative for the both the
companies for the period of 2013-14 to 2016-17. However, SBI Global factors had a positive return on equity for
last two financial years. At the same time IFCI Factors observed negative return of Equity for all the four financial
years. Return on Equity was higher in case of SBI Global factors as compared to IFCI Factors.

Table 4: Dividend per Share and Earnings per Share of SBI Global Factors and IFCI Factors (In
percentage)

The mean value of Earnings per share of SBI Global factors (-1.585%) was higher as compared to IFCI Factors (-
5.355%). Earnings per share of SBI Global factors was higher in all the four financial years taken for analysis as
compared to IFCI Factors ltd. SBI Global Factors had positive earnings per share for last two financial years
indicating that company has started generating return for its shareholders though very low as compared to money
invested.
 CONCLUSION

The comparative analysis shows that revenue for both SBI Global Factors and IFCI Factors has declined during the
period of study. SBI derives 45% of its revenue from its core operations whereas IFCI has managed to derive only
16%. The profitability of SBI Global Factors was higher as compared to that of IFCI Factors. The non-operating
expense to total expenses of SBIGFL was higher as compared to that of IFCI. SBI Global & IFCI had significant
exposure to foreign exchange exposure in terms of their expenditure but both of them gradually reduced their
exposure over the years. The turnover for IFCI has decreased substantially by almost 40%. Earnings per share of
SBI Global factors was high as compared to IFCI Factors which shows the positive returns the company has
generated for its shareholders. The return on assets, return on equity, dividend per share, earning per share was
higher in SBIGFL as compared to that of IFCI during the same period. IFCI had a negative net profit ratio for all
the four financial years though its net profit ratio was negative to a lower extent as compared to that of SBI Global
Factors. To conclude, SBI Global Factors has performed better in terms of revenue, expenditure and profitability
analysis.
 REFERENCES
 Kaur Hardarshan (2014). Financial analysis of Factoring Companies in India: A study of SBI Global
Factors and Canbank Factors. IJRMST
 Madan, Isha. (2017). Study of Financial Challenges faced by Small Entrepreneurs. International Journal of
Latest Engineering and Management Research (IJLEMR).
 State of Indian economy, banking & factoring services: RBI (2013)
 Chavali, Kavita. (2012). Factoring - A Financing Relief of MSME in India. Journal of Banking Financial
Services and Insurance Research (JBFSIR)
 Khaja Moinoddin Mohmad (2017). Factoring services in India – A study. pezzottaite journals
 Aşir, Emel (2017). Ranking of Factoring Companies in Accordance with ARAS and COPRAS Methods.
International Journal of Academic Research in Accounting, Finance and Management Sciences
 Dr. Saneem Fatima, Md. Aijaz Khan. Factoring Business in India – A Critical Analysis. International
Research Journal of Commerce Arts and Science
 SIDBI(Small Industries Development Bank of India), Study on Factoring- Policy Paper
 Annexures
APPLICATION FOR FACTORING FACILITY

To
SBI Global Factors Ltd Through
Metropolitan Building, 6th Floor The Branch Manager
Bandra–Kurla Complex SBI Global Factors Ltd
Mumbai 400 051 Branch:

Dated:

Dear Sir,

With reference to the discussions we had with the Branch Head/Relationship Manager of SBI
Global Factors Ltd, Branch, we submit hereunder our particulars to enable you to
consider sanctioning limits under the proposed Factoring Scheme.

Company’s Name: Segment of business: Manufacturing

/Trading/Processing/Services

Branch through which Dealing with/Industry:

Services required:

Details of facility Requested -

(In Cr)
Facility
Existing FIU Limits Enhancement Proposed Funds In Use
enjoyed Required (FIU) Limits Required
Domestic Factoring
Export Factoring
Reverse Factoring
LCBD
(Purchase/Sales)
Total limit capped
at

1.1 Company’s Profile

Registered Office:
Corporate Office:
Factory Address:
Email Address for
communication
Telephone No Office: Factory:
Constitution Limited Company (listed/unlisted) Partnership Proprietorship
Date of incorporation:
SSI Registration No if any
PAN of the company
CIN of the Company
TIN of the Company
Activity:

Are you an existing account holder with SBIGFL, if so,

Dealing with SBIGFL New Connection / or from
since:
Date of last renewal of our Not applicable –
account:

1.2 Latest Shareholding pattern (mention date)

:-
Shareholder names No of shares Shareholding
Face Value- (%)
Promoters:

Others:
100

1.3 KYC Details of the Board of Directors/Guarantors offered

Particulars Designation PAN No DIN No
Board of
Directors//Partners/
Proprietor

Guarantors offered DOB & Age PAN No Full Address

1.4 Name & Address of the Contact Person Their Phone/Mobile Numbers
Company’s Auditors.
1.05 Key Persons of the company authorized to communicate with SBIGFL and their contact
details
Sr Name & Designation Department Telephone/Mobile Email Address
No

1.6 Comments on the Company and its Management in Brief.

Brief Particulars of the Promoters, Directors, their qualification, experience etc.

Company’s history, products & processes, market share, future plans, competition etc.

1.7 Details of our Associates/Group Concerns:

(` in Crores-details as per last audited balance sheet)
Name Activity Net PBT Tangible net
Sales worth

1.8 i) Group (If any of the group company has availed facility from SBIGFL, please
Exposure: provide details here) (In Cr)

Company Name Facility Limit Current

Availed Position

ii) Exposure on the company as a debtor (buyer) in any other client a/c (if any):
Name of the other company:
(If not) There is no exposure on our company as a debtor (buyer) in any of the other
Client accounts of SBIGFL.
1.9 Whether Company is listed or not ?:
Listed with BSE/NSE
Capital Market Perception: (Price) (last 12 months)
High:
Low:
Present price as on:

1.10 External Credit Rating details Latest Rating & date Previous Rating & Date
CRISIL/ICRA/FITCH/SMERA
etc

1.11 Performance and Financial Indicators:

(` in Crores)
Particulars PFY-3 PFY-2 PFY-1 Key CMA
Audited Audited Latest data provided
Audited to Bank
20xx-xx 20xx-xx 20xx-xx 20xx-xx

Net sales
Operating profit
Operating profit (%)
PBT
PBT (%)
PAT
PAT (%)
Cash generation
Paid-up capital
Tangible Net Worth
Quasi-equity
Current ratio
TOL/TNW
Debtors to sales (days)
Creditors to purchases
(days)
Inventory stock (days)

1.12 Brief Comment on Company’s Financial Performance in last two years and future
expansion plans, if any including capital infusion etc.: -
 1.13 Actuals upto last Projections for the
quarter/HY/9m In Crores Next FY. In Crores
Net sales Net sales
PBT PBT

1.14 Banking Arrangement: Consortium/Multiple banking/

Name of the major bank:
Borrowing Limits: -
(` in Crores)
Bank name Sanction Fund Non-fund Interest rate
letter date based based
WC limit WC limit
BPLR+/- % p.a. % p.a.
BPLR+/ - % p.a.

BPLR+/- % p.a.

Term loan outstanding, if any as at (mention date): -

Bank name ` In Crores

Total

Term installments falling due for repayment during next two FYs.
Current Year-
Next Year -

Security provided to the working capital banks: -

 Charge on the fixed and current assets of the company.
 Personal guarantee of _ & _.
 Pledge of equity shares of face value of ` 10 each held in the name of
 EM over properties as below (including valuation if available)

(In Cr)
2.1 Sales Ledger Analysis for the proposed debtors (Buyers) under the DF/EF Facility: -
Debtor/ Turnove Max Sales Prepay Credit Avg Whether How Will the
Buyer r during o/s Ledger ment period Credit Any Payments debtors agree
names the last during Limit Percent as per period advance normally to pay to
& place one year the Requeste age docum availe amount received ? SBIGFL once
period d require ent (in d (in being By factoring
from d days) days) received Cheque/R starts, if not
To now, if TGS how.
yes how
much %?
Compa
ny A
Compa
ny B
Compa
ny C

Details of each Buyer to be attached in separate sheet

Attach if latest D&B Report is available in case of Buyers abroad.
2.2 Transaction Structure proposed for factoring .

Buyer (Debtor) Name Transaction Structure

2.3 Details of the Suppliers under the Reverse Factoring Facility

Sr No Name of the Supplier Credit Period now enjoyed
01
02

2.4 Limits Required.

(` in Crores)
Facility Avg. Sales Ledger Limit Agg.FIU limit

Domestic Factoring
Export Factoring
Reverse Factoring
LCBD (Purchase/Sales)
Total

2.5 Security Proposed for the facility:

 Primary: Assignment of Receivables factored by SBIGFL under the Factoring
Regulation Act.

Hypothecation of book-debts/other assets

(Registration of charge with ROC, in case of Companies)
The charge will be First/Paripassu/Second in nature.

Guarantees: Personal guarantees of

Director/Partner/Proprietor having NW-` Cr
Director2/Partner 2/Proprietor having NW of ` Cr
Others i) ii)
Collateral/  EM over Land & Buildings detailed as below
Others:  Insurance Cover from ECGC or Import Factor Cover for the overseas
Debtors.


2.6 Declaration/undertaking
a) Company & its None of the Directors names appear in CIBIL’s Defaulters List / RBI’s
Exporters Caution List
b) Our Company’s account with our Bankers is standard as on date.
c) We confirm that the debtors offered are not related to us .
d) We confirm that the facility, if sanctioned will be ‘with recourse’ to us only.
e) SBIGFL will have final say in approving the Debtors/Suppliers sub limits.
f) We undertake to inform SBIGFL any change in the company’s particulars as mentioned
in the application.
g) We are aware that the Processing fees paid are not refundable by SBIGFL.
h) We undertake to provide all the necessary details/facilities to the officials of
SBIGFL/Sales Ledger Auditors for the purpose of verification of our plant/office/ books
& accounts to determine the factorable accounts.
i) We enclose the relevant documents duly attested by us, as per the check list attached.
j) We further confirm that we have read and understood the contents of this application as
well as the process that will be followed by SBIGFL while sanctioning the factoring
facility as explained by the officials of SBIGFL.

We declare that the above information is correct to the best of our knowledge and we have not
wilfully withheld any material information, adverse or otherwise, that may influence your
decision.

Authorised Signature & Stamp

Name
Designation
 Date & Place

 ENCL: Processing Fees of Rs 28,090 /- (Rs. 25,000/- + applicable service tax @

12.36%) by means of

Cheque No: dated on Bank

CLIENT NAME:
Details of Debtor -( Buyer)
{To be filled in separately for each buyer}

NAME OF THE FIRM/ COMPANY :

(Debtor-Buyer)
CONSTITUTION
Established on
Activity of the Debtor
Address: Telephone/s:

Fax No :

Email Id:
PIN CODE:
PAN Number of the Debtor
Registration No./ VAT /TIN No.
CIN NO (in case of Corporates)
Authorised Designation Phone/Mobile
Person(s)
Name (s) of the Proprietor/Partners/
Chairman/ MD& CEO of the Debtor and any
other authorised signatory who looks after day
to day operations
*In case of Proprietor/Partners, further details
like, Father’s /Husband’s Name, Date of Birth,
addresses etc should be obtained

Products Sold/Services Name & Address of Buyer’s Bank

Rendered by client Bank’s Tel / Fax

Whether PO issued by
the Buyer

If so, on bulk basis or

order basis

No. of Years Of
Relationship with buyer
Sales made
Payments Terms during the
(currency/credit period) Previous Year
by (April-March)
Cheque/RTGS/NEFT
Sales-Current
etc)
Year (From
Any advance received
Actual Average Period April onwards)
of Payment
Invoices / Month Sales-Next
during last year Year Projected
Avg Value Of Invoice--
-