Factoring and Discounting of Bills would help ease Industry’s liquidity issues

New Delhi: With credit still not available to the end-user, the model of factoring and discounting of bills which have benefitted industries in countries like the US can be used as an alternative during the pandemic.

“Factoring and Bill discounting as a product have the potential to address the liquidity issues faced by the MSMEs”, stated Mr Anshuman Mohanty, Director, Ministry of MSME, Government of India at the ‘2nd Global e-Summit-2020 Factoring & Bill Discounting’, organized recently by the Associated Chambers of Commerce and Industry of India (ASSOCHAM).

According to Mr Mohanty, there are two major issues with the MSME sector today that is lack of credit and delayed payments. “Both these factors are hampering with the availability of working capital. To solve this issue, we are discussing Factoring and bill discounting as a product to overcome the points that are lacking in the traditional system,” he said.

He explained that Factoring could play a major role in the export financing segment. But unless MSMEs gain confidence in factoring it is very difficult to practice it. “At present, third party financial institutions are supporting export financials. So, we need to streamline this process that involves some credit guarantee or assurance to the industry which is the biggest hurdle in the path of practising Factoring primarily,” he pointed out.

Former Executive Director, Reserve Bank of India, Mr Sudarshan Sen stated that it could be a lack of user awareness among the one crore MSME that factoring volumes are low as compared to international markets.

“We need to look at reasons why Factoring hasn’t taken off in our country. It could also be the procedures or documentation involved today which is slightly cumbersome, and I think there is room for improvement there,” He informed.

Mr Amit Kaul, senior vice president, IFCI Factors Ltd stated that Factoring provides funds based on the strength of the debtor and strength of transaction between the client and its debtor, rather than collaterals or strong financials or the borrower.

“Some major advantages of Factoring include cash upfront on credit loss, higher-margin up to 90%, minimal security, competitive credit terms and quick appraisal and sanction. I think when the pandemic is over, the opportunities for the Factoring would be phenomenal as people will look at it from a sense of requiring liquidity and credit guarantee,” Mr Kaul said.

According to the Managing Director of IFCI Factors Ltd, Mr Bikash Kanti Roy, unlike the traditional funding program, Factoring is most accurate and highly benefitted where funding is done based on genuine invoices raised against the supplier, buyer, and financial services.

“Factoring also gives easy and fast access to working capital, especially for the MSME sector. One of the major advantages of Factoring is that consumer security is not mandatory,” he said.

Mr Roy further explained that the number of MSMEs in India is above 50 million and out of which hardly 10% have access to banking financial services. “So, there is an opportunity, MSME contributes 30% to the GDP and 40% of the total exports. Keeping in mind the importance of MSMEs, the government of India has directed PSUs and focusing on providing funds to this segment,” he added.

Sandeep Mohindru, CEO, M1 Exchange informed that at present, while carrying out the traditional factoring and bill discounting model, the seller has to limit his sources from banks based on his creditworthiness. “Funding is taking place, and bills are discounted, but it has not reached the targeted audience yet which needs to be looked after,” he said.

Peter Mulroy, Secretary-General, FCI stated that Asia is the second largest region that benefitted from factoring followed by Europe being in the first place.

“The factoring industry has been growing at the growth rate of 9%, including cross borders. China is the largest contributor to the factoring industry from Asia,” he said.

He further added that Factoring works like a great accelerator during times of crisis and to solve the liquidity issue that will majorly benefit the MSME sector. “There will be a significant drop in trade, and credit insured lines will be affected. As a major consequence, the risk could rise dramatically and not forget the impact on liquidity, pricing, repricing, and global inflation is still uncertain. Besides, numerous financial technology companies could go out of business.”

According to Mulroy, this would also have some positive impact on our industry. “Open account receivables finance volumes reached over $5 trillion in 2019, which is approximately 6% of global GDP. We will need to implement strong operational controls and maybe invest in sound technology. We also need to prepare ourselves for fraud and bring new solutions for better tomorrow,” he said.

Kishor Pradhan, Summit-Chair and CEO, Global Trade Consultancy Services explained that Factoring is a very successful product, and all the NBFCs should adopt the factoring method.

“75% of the income should be from factoring business. Unfortunately, the product has not yet received the popularity it deserves in India,” he said.

Dr Niranjan Hiranandani, President, ASSOCHAM and co-founder of Hiranandani Group informed that though the government has taken certain steps to ease the liquidity issues of the industry, the funds are still inadequate to take care of the working capital needs of most businesses.

“Hence, the Factoring and discounting of bills might play a major role in solving the issue. We need to think about traditional lending methods that do not exist today should it be brought back in the system to see that private funding for Factoring can also take place,” he said.

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