Factoring Bangladesh

5/24/2018 Factoring Bangladesh

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DOMESTIC FACTORING :Bangladesh Perspective

PRASHANTA K. BANERJEEProfessor and Director (RD&C)

Bangladesh Institute of Bank Management


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CONCEPT AND MECHNICSOF DOMESTIC FACTORING


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Is a contract between the Supplier the Factorand wherein:

the Supplier assigns receivables to the Factor

the Factor performs atleast two of the following services:

Financingby way of prepayments against invoicesSales Ledger Maintenance

Collection of Receivables

Credit Protection against Bad Debts

Notice of Assignment of receivables is given in writing to the debtors.

Factoring- What It Means?


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Factoring When Best Suited ?

Situation OfOpen Account Sales


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Involving ContinuingRelationships



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Assignment OfWhole Turnover



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Bill Discounting vs. Factoring

Financing of Receivables ofClients (Borrower) against BOEsand LC.

Lending Against Strength ofBalance Sheet .

Credit Risk on Client ( Borrower)and Client repays Credit .

Serviced by Consolidated Cash

Flow of the Client .

Security / Collateral Driven .

Only Finance

Limits Linked Security/ Collateral.

Financing against Clients(Sellers) invoices in Open AccountTrade.

Lending Against Strength ofTransactions.

Performance Risk on Clients (Borrower) and Credit/ PaymentRisk on Debtor. RepaymentComes from Debtors not Clients.

Serviced by Invoiced BackedDedicated Cash Flow from

Debtors.

Cash Flow and portfolio Driven

Finance and Value AddedServices (Sales Ledger

Management and Collection ) Limits Linked To Growth .


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Types Of Factoring

Domestic Factoring Export Factoring

For Inland sales on a With Recourse basis


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Seller Buyer

GTF

4.Transports goods

1. Places Order

Domestic Factoring Process


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Can sell on Open Account Terms

Immediate and Flexible Finance Supports growth

Not Collateral Linked

Collection and Follow ups

MIS

Credit Management

Credit Protection

Sellers Advantage

Sells More


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Can buy on open accountsubstitute LCs

Automatic revolving line

Sellers credentials established

See the goods before payment

Commercial IssuesDebit Notes/ Credit Notes/

Replacements accepted

Buyers Advantage

Buys More


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THANK YOU


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Domestic Factoring : PolicyIssues


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Industry and Business Segment

Focus

Trade/ Industry/ Services

Exposure Caps

Diversification of Risk

Preference for Sectors

Discourage Business Types

Single Clients / Group Limits

Single / Group Sales Ledger Limit forDebtors.


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Factoring Facility Parameters -1

Maximum outstanding amount ( Fund-in-Use)in respect of a single client

Individual debtor sales ledger limit

Debtor wise prepayment percentage

Debtor wise invoice tenor. It is suggestedthat tenor is decided on a realistic basis of

actual trade credit period


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Factoring Facility Parameters -2

Debtor wise facility pricing discountrate of prepayment, factoring chargeon invoice value

Upfront one time set up fee for client

Penal interest for delayed payment.

Covenants

Security


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Credit Assessment

Assessment of Performance Riskof Client (Seller)

Assessment of Financial Healthand Payment Record of Debtor

Assessment of Trade Reputationand Financial health of Client ( ForEventual Recourse , if Required ).


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Organization Structure

Chief Executive

Relationship/Marketing Mgt.

Credit & RiskManagement

Credit

Administration

Mgt.


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The Responsibilities of

Relationship/Marketing Management -1

Market factoring as a product.

Maintain relationship with clientson an ongoing basis.

Keep abreast with industry / trade

knowledge and currentinformation of business trends ofclient (seller) and debtor (buyer).


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Relationship/Marketing Management -2

Submit factoring proposals timely

and accurately to credit

department for scrutiny and

independent evaluation.

Give market feedback to Chief

Executive and other departments


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Credit & Risk Management -1

Independently scrutinize and vet thefactoring proposals prepared by theRelationship management

Recommend to the approval authorityto approve or disapprove a proposal

Oversight of factoring policies ,procedures and controls relating tocredit risk


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Credit & Risk Management -2

Oversight of quality of factoring

portfolio

Periodical review of factoring

portfolio

Advise the Chief Executive on

need to review existing

guidelines on credit & risk

management


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Credit Administration Management -1

Ensure that facility documentationincluding specific covenants andsecurity are executed in compliancewith terms & conditions of approval

and same is enforceable

Scrutinize each invoices in details toensure validity of invoices

Authorize release of prepayment andensure that aggregate prepayment atany point of time is within the salesledger limit of each debtor and withinthe overall limit of the facility.


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Credit Administration Management -2

Monitor repayment i.e., receipt of paymentfrom debtors against invoice on due date

Follow up with client/debtor in case of delayin receipt of payment from debtors

Recommend recourse to client / enforcementof security for recovery of bad debts

Custodial duties

Compliances


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Segregation of Duties

Approval AuthorityInternal Audit


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THANK YOU


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Domestic Factoring :Procedural Guidelines


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TYPES OF RISK IN FACTORING

Performance risk of client / sellerCredit risk of debtor / buyerCredit Risk of Client ( Seller) in the

Eventuality of Recourse


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Performance Risk

Years of Relationship BetweenBuyer and Seller.

All Instance of Delayed Payments

Must be Examined. The Extent and Reasons for

Dilution Should be Highlighted.

Defaults of Any Nature are to beHighlighted With Complete Detail.

Two Way Trade Must be Checked .


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Debt Collectibility Rating 1

Criteria Weight

age

Parameter Rat

ing

Weighted

Score

Period of

Relationship

(Between Clients/

Sellers &Buyers /

Debtors)

25% Above 3 years

2- 3 years

18 -24 months

12-18 months

6- 12 months

1

2

3

4

5

Dilution Level

(If the payment

received from the

factor against aninvoice is less

than the value of

the invoice)

30% Less than 5%5-10%

10- 15 %

15 -20%

Above 20%

1

2

3

4

5


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Debt Collectibility Rating 2

Criteria Weight

age

Parameter Rating Weighted

Score (Rating

Weight age)

Aging of

Debt( % of

debt

outstandin

g for morethan 30

days past

due date )

30% Less than

5%

5-10%

10- 15 %

15 -25%

Above 25 %

1

2

3

4

5

Account

Criticality (sales to a

specific

debtor as

% of total

sales of

client )

15Above 80 %

60-80 %

40 to 60%

20 -40%

Less than

20%

1

2

3

4

5


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Overall Debt Collectibility

Rating- 3Superior Satisfactory Acceptable Not

Acceptable

1 - 2 2 - 3 3 - 4 4 - 5


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Credit / Payment Risk of

Debtors

Management and Experience Competitive Position and Market Types of Industry Trade References Financial Assessment Cash Flow Assessment Debtor Payment Practice


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Debtor Rating Model-1Sl. No. Particulars Weightage

1. Industry Competency Management and Experience

Competitive Position in Market

Types of Industry (Growing ,

Matured

and Stagnating )

15%

2. Transparency and References 5%

3. Financial Assessment 404. Cash Flow Assessment 255. Debtor Payment Practice 15%

Total 100%


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Debtor Rating Model-2

Score 90%

and

Above

75-90% 60-75% 45-60% Below

45%

Rating A+ A B C D


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Documentation in Factoring

Factoring Agreement

BOE/Undertaking /Debtor Introductory Letter

Personal / Corporate Guarantee

Demand Promissory Note

Post Dated Cheques

Accepted Bill of Exchange, Where Feasible

Limits Set on Individual Debtor- TotalExposure Within the Set Limits

Set Off Clause Between Debtors andBetween Group Companies

Whole Turnover Clause


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Domestic Factoring is aFully Recourse Facility.

However, Recourse isexercised as a Tool of

Last Resort.


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Thank you


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MANAGING RISK

Performance risk of client / seller

Export / domestic- Client Audit Trail

Client Financial Analysis and Rating

Credit risk of debtor / buyer

Export Risk covered by cover from Import Factor

DomesticDebtor Financial Analysis and Rating


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Surveyor reviews the books of the client for

1. Verifying the statutory payments for any O/s dues

2. Fund based and non fund based limits of the client - for any overdueinterests and defaults on account of LCs

3. Checking for any dilution due to two way trade

4. Term loans availed by the client are checked with relevant document

like repayment schedules and term loan account in the books ofaccounts.

GTF appoints qualified field surveyors to visit the site of client

CLIENT AUDIT - PAST TRAIL

MANAGING CLIENT / SELLER RISK


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5. Trade Creditors & Trade References

6. Conducting sales ledger analysis - separate tests are done for

analysing the Invoice to Cash Trail conducted with the

historical data available for the proposed factorable customers

7. Atleast 5-10invoices checked for large factorable customer

8. All instances of delayed payments are highlighted and

corroborated with supporting documents (Invoice, BL and

Remittance Advise).

9. All Defaults of any nature are to be highlighted with complete

details

CLIENT AUDIT - PAST TRAIL



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Two Scale Alphanumeric Grading

Client Quality Rating on Alpha Scale (A-D)

Financial -40%

Cash Flow -30%

Management -15%Product -15%

-Debt Collectibility Rating on Numeric Scale (1-4)

-Years of relationship

-Invoice / Cash Trail

-Dilution Levels/ Two way trade

-Ageing of debt

-Account Criticality

CLIENT SCORE CARD



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DOMESTIC DEBTOR RATINGBASIC MODEL STRUCTURE

Industry Competency 18%

Management & Experience

Competitive Position & Markets

Type of Industry

Transparency & References 8%

Financial Assessment 43%

Cash Flow Assessment 20%Debtors Payment Practice 11%

MANAGING DEBTOR / BUYER RISK


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Factoring Agreement

Post Dated Cheques

Debtor Introductory Letter

Personal Guarantee / Corporate Guarantee

Demand Promisory Note

Accepted Bill Of Exchange

Set off clauses between group companies

Limits set on individual debtorsexposure within the set limits

DOMESTIC FACTORING - FULLY A RECOURSE FACILITY

RISK MANAGEMENT IN FACTORING


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Factoring Agreement

Signed before the start of the facility

Includes Inter alia the following clauses-

1. A) Export (with credit protection)In case of non receipt of payment,automatic payment,automatic payment done 90 days past due date

B) Domestic (With Recourse facility)In case of non receipt of

payment , we have full recourse to the seller

2. Whole Turnover clause

3. Arbitration

Any future amendments are made a part of the original agreement



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Post Dated Cheques -

Domestic Clients - One time or transaction based.

Export Clients - One time PDC for only for with recourse facility.

Deposited by GTF on due date if payment is not received

Undertaking from the client that the signatures on the PDC s will not

stand null and void as on the due date of the PDC.


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Sno Domestic Exports

1 Signed and accepted by the

buyer to remit funds to GTF on

due date.

Sent to the buyer on Clients letter head,

intimating to remit funds to the Import

Factor.

2 Funding done only on receipt of

signed and accepted debtor

introductory letter from the

buyer.

Funding done on receipt of the debtor

introductory letter on the clients

letterhead.

3 Buyer contact done by GTF

before funding the first set of

documents

Buyer contact done by the import factor

Debtor Introductory Letter -


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Personal Guarantee / Corporate Guarantee

Taken as an additional security document where the financials of the

company/firm is not strong.

The guarantors would be liable to pay to GTF any outstanding, inthe event the company/firm goes bankrupt.


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Demand Promisory Note-

Another security document given by the seller promising to pay on

demand the value as mentioned in the DPN.


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Bill of Exchange -

Drawn by the seller and accepted by the buyer, to pay to the

account of GTF on due date specified on the BOE.

Used as a security where accepted Debtor Introductory letter is notprocured.


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RISK MANAGEMENT IN DOMESTIC FACTORING

Set off clause between group companies

Where we have factoring agreement signed with two companies

under the same group-

A set off clause is signed with both the companies whereby theyagree to make good the dues of the other.


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Control on exposure on individual domestic debtor limits

Debtor limits are set after review of the financials and the rating

generated for the particular debtor.

This is entered in the system as the maximum exposure limit on theparticular debtor.

If the exposure on the debtor has to be increased the same is

presented to the board for approval.


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The Market


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1003 FACTORING COMPANIES

Euro 713 BILLION (DOMESTIC)

Euro 48 BILLION (INTERNATIONAL)

World Factoring Volumes 2003

Source : Factors Chain International


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Domestic factoring INR 8700 cr (USD 1.9 Bn Equiv)

< 1% of the overall domestic receivable financing

Export factoring INR 662 cr (USD 144 Mn Equiv)< 1% of the overall export receivable financing

Estimated GrowthDomestic Trade Finance > 12% p.a

International Trade Finance > 15% p.a

The Indian Factoring Marketing 2003

Source : Factors Chain International

Understanding The Market


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Significant SME sector

Move from LC to open account

Buyer seeking credit upto 180 days

Seller and Buyer have a continuing trading relationship

Significant exports to developing and developed markets

Understanding The MarketINDICATORS OF POTENTIAL


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Absence of law relating to factoring and/ or specifically

assignment over receivables

Confusion over title of receivables

High and varying incidence of stamp duty across different

states on assignment of receivables

Environmental Inhibitions


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SO FAR.

ON A ROAD LESS TRAVELLED

MILES TO GO

THANK YOU

Documents

Factoring Bangladesh