Factoring provides succour to enterprises by releasing liquid funds promptly when bank finance is not easily available to meet the working capital requirements. Thus, factoring provides the liquidity support which is the main requirement for the continued profitability and efficient operations of any business or industrial enterprise. The plight of the small-scale industries (SSIs) is vulnerable for two reasons viz. (i) Banks are not in a position to meet full credit requirements of the SSIs because the line of credit for working capital is rigidly structured, based on the principle of minimum contribution from promoters (ii) The buyer of the SSI products do not adhere to the payment schedule which result in delay and defaults. This causes sickness in industries.

There are around 26 lakh SSI units in India with production worth Rs 3.56 lakh crore at current prices employing 155 lakh persons and exporting goods worth Rs 37 crore. Against the above, there are 2,60,815 SSI sick units spread throughout the country of which 45.2 per cent are located in the east, 24.1 per cent in the north, 15.4 per cent in the west and 15 per cent in the south. From the point of view of default, a total of Rs 3,547.16 crore was outstanding towards bank credit as 33.1 per cent from SSIs located in the west, 25.9 per cent in the south, 23.7 per cent in the north and 17.3 per cent in the east.

SSIs can avail of factoring services which is at present provided by some bank subsidiaries—(i) SBI Factors & Commercial Services Ltd.; (ii) SBI Export Factoring Services Ltd.; (iii) Canara Bank Factors Ltd.; (iv) Foremost Factors Ltd.; and (v) Fair Growth Factors Ltd. Besides PNB , Allahabad Bank, United Bank of India and United Commercial Bank have also been short-listed by the Reserve Bank of India to be allowed to provide factoring services.

How does factoring help SSIs in providing liquidity? Factoring provides liquidity to SSIs by purchasing for cash the outstanding receivables of the enterprise which are accumulated through credit sales in the ordinary course of business dealings. Factor realises these credit sales. Once the sale transaction is complete, the factor steps in and takes course to realise the sales. Thus, the factor works between the seller and the buyer and sometimes with the seller's banks together.

Generally, the role of buyers, sellers and factors assumes the following mechanism. The transaction starts with the buyer who negotiates the terms of purchasing the goods from the seller; the buyer receives delivery of goods with invoice and seller's instructions to make payment to the factor on due dates; the buyer makes payment to the factor in time or gets extension of time or in the case of default is subject to the legal process at the hands of the factor.

The seller engages the services of the factor to realise credit sales and enters into the terms of memorandum of understanding (MoU) with the buyer in the form of a letter exchanged between them or an agreement entered into between them; the seller sells goods to the buyer as per the terms of the MoU; and delivers to the buyer the copies of invoice, delivery challan, MoU and instructions to make payment to the factor. The seller receives 80% or more payment in advance from the factor on selling the receivables; and receives balance payment from the factor after deduction ofthe factor's service charge, etc. on realisation of the outstanding dues fromthe buyer.

Thus, the seller is benefited in realising the sales to the extent of 80 to 90 per cent which serves to tone up his working capital.

On the part of the factor, his obligation starts with his entering into an agreement with seller for rendering factor services to it. The factor activates on receipt of copies of sale documents as referred to above and makes payment to the seller 80% of the price of the debt. In turn, on realisation of outstanding of sales, the factor receives payment from the buyer on due dates and remits the balance to the seller after the usual deductions.

The factor also ensures that the following conditions are met to give full effect to the factoring arrangements: viz. (a) The invoice, bills or other documents drawn by the seller contain a clause that these payments arising out of the transaction as referred to or mentioned therein might be factored; (b) the seller should confirm in writing to factors that all the payments arising out of these bills are free from any encumbrances, charge, lien, pledge, hypothecation or mortgage or right of set-off or counter-claim from another, etc.; (c) the seller should execute a deed of assignment in favour of the factor to enable the latter to recover the payment at the time or after default; (d) the seller should confirm by a letter of confirmation that all conditions to sell-buy contracts between the buyer and him have been complied with and the transaction is complete; and finally the seller should procure a letter of waiver from the bank in favour of the factor incase the bank has charge over the assets sold out to the buyer and the sale proceeds are to be deposited in the account of the bank.

(To be concluded)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.