Purpose of setting up GTF:
Global Trade Finance is a joint venture between West LB, Exim Bank of India and IFC, Washington. The purpose of setting up such an organization is to provide a fillip to factoring on an international standard in India. Factoring industry in India has almost languished and is restricted to domestic business. In the export sector we wanted to bring in financing which was focused on receivables, as an alternative to letters of credit and gives an option to exporters to offer the same terms as their competitors from other countries are able to offer. West LB is a global leader in the forfeiting business and support us in devising our similar line of business. We find that the size of transaction of forfeiting business is same and most of them were not handled because of the cost.

GTF offers the forfeiting business for small transactions. We are doing all the administrative work here in India and do offload the risk in the international market. It allows exporters who need forfeiting for small-medium transactions to avail of this product, though forfeiting constitutes hardly 10-15 per cent of our business.
But we wanted to bring all these under one roof, so that as a receivable financing option the exporter had the range of services available to him.

On products:
Factoring is a receivable financing and management product, which is suited for selling products that require short-term credit. For example: garments, textiles, auto ancillaries, manufacturing intermediates, chemicals, pharmaceuticals, etc basically needs factoring services. Forfaiting is used as a receivable financing product for items, which require long-term credit and which are being exported to countries where it is normal for the exporter to open a letter of credit or provide a bank guarantee for the receivable. The term for factoring ranges from 180 days to 10 years, depending on the factors like markets we are selling to, the size of the transaction and the product, etc; for example: transaction on machinery, capital goods, infrastructure projects, construction, etc that require long-term credit will opt factoring.

We have these two products- factoring and forfeiting and we combined them to offer a range of services to the clients.
Yes, we do get a lot of help from Exim in terms of marketing tools and clients who are Exim clients. We built the entire portfolio from scratch.

On Competition:
Canara Bank and SBI Bank are already in the factoring business.
We are competing in the same market, but Canara Bank and SBI are more focused on the domestic market. Our focus is on the international market. But we are now growing in the domestic business also but our focus remains on the clients who are globally competitive. The is the reason why factoring business does not depend on the financing so much but also on the servicing too which is credit protection (cover for the credit risk), collection and administration. It suits best medium sized to large corporates.

The service charges we levy depend on the domestic and the international markets, charged essentially for credit protection, collection and administration of the invoices and the sales ledger. It ranges from 0.1 per cent in the domestic market and could go as high as 1.2 per cent for higher risk countries (like Latin America, Iran, Turkey, etc) where most of it goes as credit protection charges.

On GTF's competitiveness internationally
In terms of competitiveness, our rates on the commission are in lines with the international market and our interest rates are in line with the local markets.

On marketing of the products
We do direct marketing. We also market in combination with Exim Bank, we also work with a large number of financial intermediaries. We also have reverse reference from our factors abroad. Of the total business we receive roughly about 40 per cent through direct marketing, 10 per cent through reverse referrals, 10 per cent from other institutional referrals, seminars, etc and almost about 20 per cent of e through financial intermediaries

Maturity of the Indian market
India is not a mature market at all. In a mature market, factoring is seen as a distinct service vis-à-vis the banking products for the receivables. Essentially, what the banks provide for receivable is finance, they look more at the corporate client and the risk that they can take based on the balance sheet of the client and risk profile. When factoring is looked at as an independent product, it is not only finance but credit protection, credit management and collection.

In the domestic market, we cannot provide credit protection because we do not have well developed credit information agency that gives credit information and nor is there any credit insurance available so we have to fall back on the risk of the client. Therefore, the product differentiation in domestic market becomes much less.

This is one of the reasons why we started with the export profile and fashion our products on the lines available in the international market. We are member of the Factors Chain International (FCI). We look at small, medium sized clients who are looking at not just the credit but are moving away from letter of credit to open accounts where collection is also important. It makes sense for a large corporate to have an internal collection department but for a small and medium sized collection, it becomes important to have collection across different countries and different time zones and also comply with the legal requirements. In this case, our correspondents would collect for us.
It also provides credit management services. By being involved proactively in collection process, the factor is in a much better control of the risk. So we can move away from purely looking at client's balance sheet to his basket of debtors. And respond to growth requests much faster and also whether the client can deal with a particular buyer or not. In a mature market, we have clients who look at the most flexible and cost-effective financing and also there is the segment of SME segment which is getting better value and funding from other institutions. It is the development of this segment that will determine the maturity of the factoring segment.