Mumbai, July 2: The Reserve Bank of India has permitted SBI Factors & Commercial Services to raise funds for a minimum three-month period. Currently, companies in the factoring business are not allowed to raise funds for less than a year.

This is expected to come as a shot in the arm for SBI Factors which proposes to raise as much as Rs 50 crore to augment its fund requirements. SBI Factors, which is controlled by State Bank of India and its associates, proposes to raise short-term debt through commercial paper and inter-corporate deposits. In addition to this, the factoring company has already received a Rs 50 crore line of credit from SBI. SBI Factors also plans to come out with a Rs 10 crore commercial paper programme.

Raising deposits for one year and above is not practical for factoring companies since their fund requirements are for periods of 90 days and less. "Raising deposits for more than a year will lead to serious asset-liability mismatches", said a source at SBI Factors.

The factoring company has also sought the approval of the finance ministry's for an exemption on withholding tax to make a foray into international factoring.

The company is seeking a special status from the finance ministry for a waiver in the withholding tax, that is deducted at source out of the interest paid by corporates seeking advances for export factoring from the company. "The response of the exporting community has been encouraging and we think that this is a profitable area to enter into", said a source at SBI Factors. Currently, only Foremost Factors, a Delhi-based company is engaged in factoring in a big way. The factoring business which has a potential of Rs 10-15,000 crore annually for receivables finance, has not yet taken off in India due to constraints factoring companies face in raising funds. In 1996-97 SBI Factors and Canbank Factors, the biggest players in the Indian market, did business of just Rs 1,000 crore.

SBI Factors which has a capital adequacy ratio of 65 per cent was until recently constrained by the inability to leverage itself under the old guidelines of the Reserve Bank of India.

The credit policy announced by RBI in April 1995 classified factoring companies as miscellaneous non-banking financial companies, which restricted their maximum borrowings from banks to the extent of only one time their net owned funds (NOF). This policy measure severely impacted the fund availability for factoring companies.

Subsequent representations to RBI lead to the relaxation of the borrowing limits to three times NOF from banks and an additional one time NOF from the Small Industries Development Bank of India. This relaxation however came about only in the last quarter of 1995-1996. In the process, factoring companies lost a significant amount of business due to the low availability of funds.

At present, there are only five players in the Indian factoring business. Apart from SBI Factors, the others in the business include Canbank Factors, Foremost Factors, Integrated Finance and Wipro Finance. Though factoring companies have approached banks offering to provide their services to the banks' clients, most banks have not responded positively since they see factoring as a threat to their business.

According to a senior executive at SBI Factors,"rather than being a threat, factoring is a financial service which is complimentary to that of banks. Since the proceeds of factored debts are routed through the banks, it helps in improving the quality of advances of banks. This in turn helps them to bring down their non-performing assets".

SBI Factors which recorded a turnover of Rs 440 crore in 1996-97, is targeting a turnover of over Rs 1,000 crore in 1997-98 provided the credit offtake improves during the year.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.