Factoring firms eye up the long-term growth opportunities in the Asian market, writes Kevin Godier.

Malta-based trade finance specialist Fimbank has returned to India, where its new India Factoring and Finance Solutions joint venture (JV) received an operating licence from the Reserve Bank of India in October 2010. After a similar JV experience with GTF India, in which it sold its stake to the State Bank of India in March 2008, Fimbank is “now back in India for the long haul”, according to the bank’s president Margrith Lutschg-Emmenegger.

Meanwhile, independent provider Bibby Financial Services (BFS) is supporting its Indian and Australian operations, by setting up shop in Hong Kong, where it is targeting SME businesses exporting to western OECD markets.

Both companies see enormous future potential in Asia, where Ian Watson, BFS chief executive for Asia Pacific, believes that the factoring business can be expanded hugely. “Some Asian markets are quite well serviced – Taiwan has been for some time, and Japan and Hong Kong to a lesser extent. But if you look at the ongoing trade flows, there is a potential opportunity for financing SMEs,” he claims.

“Europe and North America are net importers from Asia, but both regional economies are struggling, in contrast to the tiger economies coming out of Asia,” says Watson. “Given the tendency to move away from letters of credit (LC), which tie up buyer capital and are time-consuming for the seller, the potential to service SMEs looking for export finance is undoubtedly there, but the pace of change is the key.”

Similarly, Lutschg-Emmenegger underlines that many Asian countries are well-suited to factoring, “not only with regard to product and trade but also the need to improve cash flows and improve exports”. The key is, she notes, “the increasing volume of trade flow between the countries where factoring can help – trade is critical and huge in Asian countries, compared to Africa and some other regions”.

Indian focus

For the time being Fimbank’s focus is firmly on its new Mumbai-based company, which involves a 49% stake worth US$10mn from Fimbank, after it signed an initial JV agreement with three partners in November 2009. Under the JV terms, India’s second largest public-sector bank, Punjab National Bank (PNB) will own 30% of the new company, while Italian factoring specialist Banca IFIS and India’s Blend Financial Services will own the remaining shares.

Speaking to GTR, she detailed a plan to spread the factoring message across the entire Indian economy. According to Lutschg-Emmenegger, “India offers paramount opportunities for these products and is economically and politically stable and in a very positive mode – these factors will help our newly established company to quickly grow and create a strong position in the market.”

The JV will provide factoring, forfaiting and trade finance solutions, primarily to the SME sector, which is a key driver of the Indian economy in terms of contribution to GDP, employment and exports. “Clearly India Factoring and Finance Solutions will focus on offering most comprehensive and professional factoring products to the Indian market, particularly to the small and medium-sized companies,” she explains.

The product range will also encompass international factoring products subject to all necessary regulatory approvals. “In addition to targeting the domestic SME factoring market, we would want to increase international factoring and bring India to the forefront of business providers for the industry,” she stresses.

Asked by GTR on the potential for expanding factoring within India, she explains that the country’s sheer size is such that many smaller cities have not yet been approached or covered by the industry. “The country is actually more like a continent, the economy is still growing strongly, and there are vast numbers of SMEs – so there is a massive need for this type of service. Many Indian companies are already quite familiar with the business and the opportunities it can offer, but the size of the market means that there is still a lot of potential new business that can be developed,” she suggests.

The plan is for India Factoring and Finance Solutions to open a series of offices across India to grow and service a client base. “We have the head office in Mumbai and regional offices already open in Delhi and Chennai to initially cover the western, northern and southern regions. We are planning to gradually open more offices to a position where we end up with approximately 20 offices spread across the country.”

Meanwhile BFS’s turnover in India from its Delhi base “is growing steadily”, notes Watson. “We have been in the market for around three and a half years, focusing mainly on domestic factoring, and the next step will be to expand our footprint to give more coverage in Mumbai, Calcutta and possibly another city. The size of the market and the GDP bring such superb opportunities, but India’s various regions are all so strong that you need to be present to service them.”

The expectation is to introduce export factoring to Indian SMEs in the year ahead, and BFS is also anticipating improved legislation for debt assignment. “This is still being established, but the situation should change in the next year or so, giving rise to a more secure, time-efficient and less paper-intensive process,” he explains.

Market competition

Existing factoring competition in the Indian market consists primarily of the major domestic banks. “The local banks are offering factoring products but they always find it more difficult to offer these services to the SME sector.”

Other major factoring players in India include Canbank Factors and IFCI Factors as well as multinational banks like HSBC and Standard Chartered. Another rival is the former GTF, now SBI Global Factors (the merger between SBI Factors and GTF) 91% owned by India’s largest bank, State Bank of India and 9% by the state-run Bank of Maharashtra.

GTF commenced its operations in 2001, and was “a pioneer for the factoring product in India, from which we learned a lot,” highlights Lutschg-Emmenegger. “We had a wonderful experience in India with GTF and would like to replicate and improve on that with India Factoring.”

PNB, Banca IFIS and Blend will all play their roles in this respect. “We have excellent partners and a very experienced and professional team hence we have every reason to believe that our target to become a leading player in this field in India is very achievable,” predicts Lutschg-Emmenegger.

She continues: “PNB brings of course a wide network, and therefore access to customers as well as funding, reputation and image, whereas Fimbank is still a relatively unknown name in India.

“Blend is also well connected in India and will be assisting access to customers. Banca IFIS is a great factoring company in Europe and will support our international business substantially, and it will be good to have another European shareholder.”

Asian landscape

Having also created factoring tentacles in Beirut, Cairo, Dubai and Moscow, Fimbank is seeking to replicate its factoring model in other Asian markets, and has inevitably seen huge potential in China’s SME market. However Chinese regulations limit the establishment of highly specialised financing services by JVs involving foreign partners.

“For Fimbank at this point it is a bit too challenging but we will keep trying and investigating. We are looking at ways and means all the time but so far we have not been able to find a truly viable alternative,” Lutschg-Emmenegger says.

BFS’s Watson cites several obstacles to developing Chinese factoring business for entities outside the banking sector. “China is rapidly developing but is not recognised as favourable for factoring companies yet, as much as anything because the legal status and regulations for independents across the regions is too unclear to bring in investment and expertise. Factoring licences may exist in one part of China but evidence is less clear elsewhere.”

An additional issue is the ever-changing landscape in China.

“The rules can change very rapidly, The Chinese banks that dominate the financial markets tend to see change coming, and can adapt rapidly.

“But this is far more difficult for independents, for whom the sheer size of the market is also a huge challenge.,” remarks Watson.

Hong Kong remains a far more viable option. “Hong Kong is a key access point for the flow of trade out of Asia-Pacific, the regulatory environment is quite similar to the UK, and the plan is to expand over the next 12-24 months.” GTR