Mumbai: Exporters already troubled by limited funds and slowing demand are held back further as so-called factoring companies have tightened lending against payments that aren’t insured, according to a senior executive at Global Trade Finance Ltd (GTF), the factoring arm of State Bank of India (SBI).
Factoring companies provide credit to exporters against money owed by the buyers for goods already delivered, but normally only if the payments due are insured.
In the wake of the economic slowdown in the US and Europe, key markets for Indian exporters, many insurers are reluctant to take on the risk of financially strapped overseas buyers. The factoring companies are shying away from taking on the entire risk themselves.
Worrisome scenario: Fieo’s Ajay Sahai says the problems in securing credit insurance started after September, when Lehman Brothers went bust, and notes that single buyers are facing greater difficulty. Manvender Vashisht / PTI
Following the slowdown and credit crunch globally, insurers are not willing to take the risk, said Arvind Sonmale, managing director and chief executive of GTF, which has an 88% share of the international receivables finance business.
Indian exporters are facing issues on several fronts such as a lack of trade credit, hard bargaining by buyers for steep discounts, payment defaults as well as the rising costs or a lack of credit insurance. This has led to payment cycles being stretched and an excessive build-up of inventory, he added. “As for factoring, availability of credit insurance is an issue. Even when it is available, the costs are high,” said Sonmale. “Credit insurance is vital to cover credit risk, and is especially important for international factoring.”
Laxman Sankade, managing director of Canara Bank Factoring, a subsidiary of the public sector Canara Bank and one of the first factoring businesses in India, echoes Sonmale’s concern.
“It is true that international insurance companies are not providing cover. This all happened after the credit crisis. Before this, everything was going well,” said Sankade. “We are not doing any international factoring since the last two-three months.”
Ajay Sahai, director general of Federation of Indian Export Organisations (Fieo), a trade body to promote exports, also acknowledged problems in securing credit insurance after September when US-based brokerage Lehman Brothers Holdings Inc. went bust.
“The problem is with single buyers where insurance companies are not giving credit cover. But if the cover is for the whole turnover, then insurers have no problem. Single buyers have a high chance of default and post-September, insurance companies are not ready to take that risk,” said Sahai.
India’s exports fell 12.1% year-on-year to $12.8 billion (Rs62,208 crore today) in October, and analysts have forecast another six months of weak sales overseas.
According to Factors Chain International, a network of factoring companies worldwide, India’s factoring volume reached €5.05 billion (Rs33,179 crore today) in calendar 2007 from €690 million in 2001.
Credit insurers such as the Netherland-based Atradius, France-based Euler Hermes and Compagnie Francaise d’Assurance pour le Commerce Exterieur (Coface) provide cover for India’s exports in Europe, where Indian engineering and agro-processed products are in high demand.
Sonmale said GTF has stopped giving credit to exporters in sectors such as steel, auto ancillaries, construction, textiles and leather as delayed payments and delinquencies are rising in these businesses.
“We are choosy in lending since September. Unlike banks, we don’t have a collateral and insurance companies have suspended their credit cover,” he added. “For two years, we had zero NPAs (non-performing assets, or bad debt); the quality of assets was very good. Last year, the NPAs were only 0.1%. Now, we are expecting gross NPAs to reach 1%.”
GTF’s turnover has grown to Rs11,123.70 crore in fiscal 2008 from Rs63.60 crore in fiscal 2002.
Sonmale expects the revenue growth to slow to 30% in fiscal 2009 from 85% in the previous year.
SBI is considering merging GTF, which it bought in March, with its other factoring subsidiary SBI Factors and Commercial Services Pvt. Ltd, he added. Besides, GTF is in talks with American International Group Inc. to start its credit insurance business in India.
SBI and Canara Bank started the factoring business in India in the early 1990s. Now several firms, including Citibank NA and Hong Kong and Shanghai Banking Corp. Ltd, have factoring businesses in the country.
Meanwhile, factoring companies are in talks with credit insurers to resume providing covers for the exporters.