How To Evaluate The Performance Of Indonesian Factoring Business

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1 Performance Evaluation of Indian Factoring Business: Some Lessons for Bangladesh - Prashanta Kumar Banerjee Abstract Factoring is a global industry with a vast turnover. It offers various advantages like consistent cash flow, lower administration costs, reduced credit risks and more time for core activities. Both the domestic and international factoring are getting popularity at an impressive rate in all parts of the world. Bangladesh is yet to introduce factoring services. Because of common regional and economic characteristics, the experiences of Indian factoring industry might help Bangladesh to introduce factoring services, of course, within her own socio -economic frame. The factoring services made an entry in India in the year Since then, a good number of factoring companies namely SBI Factors Limited and Commercial Services Ltd., Canbank Factors Ltd, Wipro Finance Ltd., Integrated Finance Company Ltd, and Foremost Factors Factors Ltd have been offering factoring services in India. This paper evaluates the operational and financial performance of Indian Factoring Companies and finally tries to draw some lessons for Bangladesh. For this, Ratio, Annual Average, Average Per Annum Growth Rate, Compound Growth Rate and Mann - Whitney U test have been used. The study confirms that operational and financial performance of the factors in India has been improving over time. 1. Introduction The factoring services 1 made an entry into India with deliberate attempt supported by the industrial organizations and academicians as a step forward to upgrade economy in the year To introduce these services, for the first time, Working group on Money Market popularly known as Vaghul Committee was constituted in 1987 which strongly recommended for introducing factoring services, particularly for small scale units (Sengupta et. al. 1991, p.29). Later, the Study Group for Examining Introduction of Factoring Services in India popularly known as Kalyanasundaram Committee, The author is Assistant Professor, Bangladesh Institute of Bank Management. The views expressed in this article are author's own. 1 Factoring is an arrangement in which the receivables arising out of sale of goods or providing services are purchased by/ sold to the factor as a result of which the title to the goods represented by the said receivables passes on to the factor in consideration of advance to the seller. The factor then becomes responsible for all credit control, sales accounting, and debt collection from the buyers. Moreover, if any debtor fails to pay the dues, the factor has to absorb the losses, as he normally has no recourse against the client i.e. the supplier.

2 Banerjee: Performance Evaluation of Indian Factoring Business 65 which was appointed by Reserve Bank of India (RBI) in 1988, found an abundant scope for factoring services and strongly advocated for the introduction of these services in India (Kuvalekar 1997, p.1). The said committee viewed that only four or five banks either individually or jointly could be allowed to start these services on zonal basis. The RBI accepted the findings of the committee and permitted both the State Bank of India and Canara Bank to start factoring services through their subsidiaries. Accordingly, two factoring companies in India i.e. SBI Factors Limited and Commercial Services Ltd. 2, and Canbank Factors Limited sponsored by the State Bank of India and Canara Bank, respectively, commenced operations in Subsequently, a few more new factoring companies like Wipro Finance Ltd., Integrated Finance Company Ltd., and Foremost Factors Ltd. have also entered the field of factoring business. But their activity is too small to take any cognizance of. However, SBI Factors Limited and Canbank Factors Limited are the market leaders of Indian Factoring business. The total volume of Indian factoring business is around Rs at the end of financial year which is dominantly shared between SBI Factors Limited and Canbank Factors Limited. Investment Information and Credit Rating Agency of India Ltd. (ICRA) has affirmed A1 + rating (indicating highest safety) for short-term debts issued by SBI Factors Limited and Canbank Factors Limited. Besides providing pre-payment and collection services, they provide other value-added services like sales ledger maintenance, advisory services, etc. Both the companies have obtained a license from RBI to commence export factoring. The keenness of implementing a financial service mostly depends on uniqueness of this service. The uniqueness reflects in the operational performance, risk management ability, and profitability performance of the financial institutions, which render this service. Cooper (1995, p. 21) in his work on how to launch a new product successfully has expressed the same view. Bangladesh has common regional and economic characteristics with India. The experience of India might help Bangladesh to introduce factoring services, of course, within her own socio-economic frame. India introduced this service 2 For short, in the text, only 'SBI Factors Limited' has been used in place of 'SBI Factors and Commercial Services Limited'. 3 Rs. refers to Indian currency.

3 66 Bank Parikrama way back in Ten years are a good period to evaluate the operational performance, risk management ability, and profitability performance of the factoring companies. An attempt has been made here to evaluate the performance of Indian Factoring Companies with special reference to SBI Factors Limited and Commercial Services Ltd., and Canbank Factors Ltd. in order to draw lessons from their performance. 2. Sources of Data and Methodology The data relating to factoring business has been obtained from: (a) (b) annual reports of SBI Factors Limited and Commercial Services Ltd.; (c) booklets and brochures of SBI Factors Limited and Commercial Services Ltd.; (d) annual reports of Canbank Factors Ltd; and (e) reports on proceedings of the FCI Marketing Seminar on International Factoring, held at Singapore from March, Data has been collected for the period to To measure the performance of the Indian factoring companies, three aspects namely operation, risk management and profitability have been considered. The operational performance has been measured in terms of the following variables: (a) turnover; (b) debt-purchase outstanding; (c) collections; (d) industry-wise exposures. Turnover refers to the turnover of factored debts of a factoring company for the whole year, debt-purchase outstanding to the amount of factored debt outstanding at the end of a financial year, collection to the amount of recovery during the whole year, and industry- wise exposure to the extent of diversification of a factoring company s portfolio. The risk management of factoring companies has been measured through the following ratios 4 : (a) capital adequacy ratio; (b) plough-back to shareholders equity ratio; (c) non-performing assets ratio; (d) earning volatility ratio; and (e) loan to equity ratio. To assess profitability of operations, the following five ratios 5 have been used: (a) return on assets; (b) return on equity; (c) factoring income to assets; (d) non-factoring income to assets; (e) dividend payout ratio. 4 5 Encyclopedia of Banking and Finance (ed.) by Charles J. Woelfel has prescribed eight ratios for analyzing risk of a bank or a financial institution. Of them, the most relevant three ratios and two more ratios (Plough back to Shareholders' Equity Ratio and Non -performing Assets Ratio) are used for analyzing the associated risk of factoring companies. The useful measures of profitability that are available to management, stockholders and regulatory agencies include return on assets (ROA), return on equity (ROE), and dividend pay out ratio (Sinkey 1998, p.532). Moreover, because of the special nature of factoring business, here two more ratios are used, namely factoring income to total assets, non- factoring income to total assets.

4 Banerjee: Performance Evaluation of Indian Factoring Business 67 In calculating profitability ratios, average figures have been taken as denominator 6 and profit after tax has been taken as numerator. The annual average, averages per annum growth rate and compound growth rate have also been considered. Annual average is calculated by adding together the values of various years and dividing the total by the number of x years x =. The average per annum growth rate is calculated by adding n y year to year growth rate t y0 100 and dividing the total by the y0 number of years. The compound growth rate has been calculated by employing equation lny =a+ bx. Mann - Whitney U test has been used for sharpening the analysis. 3. Results 3.1. Operational Performance Operational performance is a labor room for profitability and risk management of a financial institution like other organizations. Data and relevant calculations on various aspects of operational performance of SBI Factors Limited and Canbank Factors Limited like turnover, debt purchase outstanding, collections, and industry- wise exposure are placed in Table 1 and Graphs 1, 2, 3, 4(a), 4(b), respectively, and the following inferences have been drawn. Turnover SBI Factors Limited has achieved turnover of Rs crores in as against Rs crores in with annual average of Rs crores. In , it recorded an impressive growth rate of per cent over the year Turnover has gone up by 3.94 times during the reference period. Average per annum growth rate of turnover comes to per cent and compound growth rate comes to per cent for SBI Factors Ltd.. Canbank Factors Ltd. has recorded turnover of Rs crores in as against Rs crores in , with annual average of Rs. 6 The logic behind considering average figures as denominator is that profits are earned over a period of time and if ratios are calculated on balances that are not average then the figures would be distorted and have no real meaning (Palat 1989, p. 74).

5 68 Bank Parikrama crores. It has registered a remarkable growth rate in the two consecutive years in and with growth rate of per cent and per cent over the previous year. Average per annum growth rate stands at per cent and compound growth rate at per cent. It is revealed that both the companies have booked a good volume of turnover with an impressive growth rate before , thereafter it is either a very slow growth rate or a negative growth rate. The Mann -Whitney s U test shows that year - wise turnover of SBI Factors Limited and Canbank Factors Ltd. over the entire period of analysis is same. Debt Purchase Outstanding The average debt purchase outstanding of SBI Factors Limited stands at Rs crores during the period to and the amount varies from Rs crores in to Rs crores in SBI Factors Limited registers average per annum growth of per cent and compound growth rate of per cent. For Canbank factors, the range of debt purchase outstanding is between Rs crores in and Rs crores in with annual average at Rs crores. It achieves average per annum growth of per cent and compound growth rate of per cent. In addition, debt-purchases have gone up by 4.15 times and 3.76 times over the period for SBI Factors Limited and Canbank Factors Ltd., respectively. The U test shows that there is no difference between the year- wise debt purchase outstanding of SBI Factors Limited and that of Canbank Factors. Collections SBI Factors Limited has recorded Rs crores for average collection amount during the period to The amount of collections varies from a maximum Rs crores in to a minimum of Rs crores in (Graph-3). This amount has gone up by 5.31 times during the period. It maintains a good upward growth trend with an average per annum growth rate of per cent and a compound growth rate of per cent. For Canbank Factors, the average collection amount stands at Rs crores during the period. The amount of year- wise collection varies from Rs crores in to Rs crores in It achieves collection amounts 3.64 times more in as against The average per annum growth rate and compound growth rate are per cent and per cent, respectively.

6 Banerjee: Performance Evaluation of Indian Factoring Business 69 It is revealed that the collection machinery is doing better in the case of SBI Factors Limited as compared to Canbank Factors due to the systematic and vigorous collection system of SBI Factors Limited. But according to the U test, there is no statistically significant difference between the performance of SBI Factors Limited and that of Canbank Factors Ltd. on this criterion. Industry- wise Exposure The diversified portfolio of a financial institution ensures certainty about returns. Industry -wise exposure of SBI Factors Limited consists of manufacturing, trading, and service sectors {Graph 4 (a)}. These sectors include chemicals and fertilizers; plastic / polypropylene / packaging; metal containers / extruded parts / auto ancillaries; trade and services; consumer durable; printing inks / paints; and miscellaneous. Of them, chemical and fertilizers (21%), plastic / polypropylene / packaging (18%) and metal containers / extruded parts / auto ancillaries (17%) hold the maximum share of total exposure. Trade and service sector, which is being offered since , holds a considerable share i.e. 14 per cent of the total exposure. The clients of Canbank Factors are mostly from auto ancillaries; bulk drugs; cable; automobile; chemicals; distilleries, paper; engg-gen; packaging; textile; steel; electronics; trading and others {Graph 4 (b)}. Of them, engg- gen (18.72 per cent), elec/ E/ nics (12.36 per cent); auto ancillaries (11.76 per cent) hold a double figure percentage of the total exposure. As against these, trading sector takes only 2.5 per cent whereas service sector has no figure till now. It emerges from the analysis that industry- wise exposure of Canbank Factors Ltd. is more diversified than that of SBI Factors Limited. However, SBI Factors Limited has mentioned in its annual report that with a view to having a well- diversified portfolio of assets, the company takes care to select clients from a wide range of industries. Moreover, SBI Factors Limited is doing well in the trade and service sector with per cent of the total exposure as compared to Canbank Factors, which has 2.5 per cent of the total exposure, that too only for the trade sector. In brief, it is seen from the analysis of operational performance that the portfolio of Canbank Factors is more diversified than that of SBI Factors Ltd. whereas collection performance is better for SBI Factors Limited as compared to

7 70 Bank Parikrama Canbank Factors Ltd. In case of turnover and debt purchase outstanding they show almost the same picture during the reference period. However, both the companies have shown better performance till , thereafter they follow a slow growth trend Risk Management Risk Management is an integral part of the management of financial institutions funds. Financial institutions must make sure that they are compensated with earnings proportionate to the risk they expose to, and they must balance the levels of risk that exists within and among their various portfolios. Financial institutions, should, therefore, consider how much risk could be taken to achieve the highest yields without compromising the safety of their funds. The used ratios to assess as to what extent both the factoring companies efficient in managing their risks are presented in Table 2 and the following inferences have been drawn. Capital Adequacy Ratio The capital adequacy ratio of SBI Factors Limited, calculated on the basis of Reserve Bank of India s (RBI) guidelines, works out to 37 per cent as on the 31 st March The ratio in the rest of the reference period is in the range of 210 per cent in to 37 percent in The capital adequacy ratio of SBI Factors Limited is much higher than the minimum capital adequacy ratio stipulated by RBI 7. For Canbank Factors Ltd., this ratio varies from a minimum of 22 per cent in to a maximum of 38 per cent in , which is also much higher than the stipulated minimum capital adequacy ratio as prescribed by RBI. It is revealed that both the companies are extremely careful in observing the RBI directives in regard to prudential norms of capital adequacy but SBI Factors Limited is more capable of providing funds in case of temporary and unexpected loss RBI has, in its guidelines issued to Non-banking Financial Companies (NBFCs) in January 1998, directed that they should achieve a capital adequacy ratio of at least 10 per cent by and 12 per cent before (Annual Report , SBI Factors Limited and Commercial Services Ltd.) Temporary is emphasized since no reasonable amount of capital will sustain a financial institution incurring losses for an extended period of time. Unexpected losses are singled out because there are often specific reserves set aside when losses are anticipated (Orgler et. al.1976, p. 14).

8 Banerjee: Performance Evaluation of Indian Factoring Business 71 Plough Back to Shareholders Equity The plough back to shareholders equity of SBI Factors Limited during the period to is in the range of per cent to per cent. In the case of Canbank Factors Ltd., this range is from a maximum of per cent in to a minimum of 8.96 per cent in Canbank Factors Ltd. is enhancing its equity capital account to a level higher than that of SBI Factors Limited by means of generating more funds from its internal sources. It is, therefore, revealed that Canbank Factors is more careful to tackle risks by augmenting its capital through internal sources. Non Performing Assets SBI Factors Limited has been maintaining zero non-performing assets (NPA) from its inception till In , the non-performing assets have started appearing in accounts. Thereafter, the figure of NPA has increased sharply from 0.64 per cent in to 5.90 per cent in Canbank Factors has received non-performing assets first in Thereafter, NPA level has gone up from 0.15 per cent in to 1.64 per cent in This percentage has been reduced to 1.00 per cent in These percentages are considered to be very low considering the cumulative business volume registered by the companies. It is, therefore, revealed that both the companies have kept their NPAs level under a minimum percentage during the reference period except in when SBI Factors Limited got a handsome percentage (5.90 per cent) of NPAs. This is because they have paid a serious attention in the matter of selection of clients and customers and continued to monitor these accounts by means of a meticulously designed Management Information System (MIS). Earning Volatility Ratio Earning volatility ratio of SBI Factors Ltd. is 1.72 whereas this ratio is 0.85 in the case of Canbank Factors. So, variation in SBI Factors Limited earning flows during the reference period is wider as compared to Canbank Factors. It infers that earnings of SBI Factors Limited shareholders are subject to a more degree of risk than those of Canbank Factors shareholders.

9 72 Bank Parikrama Loan to Equity Ratio The SBI Factors Ltd. s loan to equity ratio begins only from For it, the loan to equity ratio varies from a minimum of per cent in to a maximum of per cent in For Canbank Factors, this ratio is in the range of per cent in to per cent in The loan to equity ratio of SBI Factors Limited is found to be much lower than that of Canbank Factors. A narrow capital base is in fact not unusual among factoring companies. (Green 1993, p. 44) However, gearing of Canbank Factors is seen to be high. Sinkey (1998, p. 579) says that when loans to equity ratio is more then 50 per cent, the book value of a financial institution is termed insolvent. Moreover, London and Provincial Factors had gone in for insolvency at June, 30, 1991 when its gearing stood at over 600 per cent (bank loan and overdraft of 9.7 m against 1.6m share capital and reserves (Green 1993, p. 44). To sum up the above analysis on risk management of SBI Factors Limited and Canbank Factors, it indicates that SBI Factor s performance is better than that of Canbank Factors in terms of capital adequacy ratio and loans to equity ratio. On the other hand, the performance of Canbank Factors is better on the basis of earning volatility ratio and plough-back to shareholders equity ratio. In case of asset quality, although SBI Factors Limited has shown a better picture till as against Canbank Factors, it has turned into a grief situation when this figure climbed up to 5.9 per cent in It is revealed here that capital structure, and assets quality of SBI Factors Limited are better than those of Canbank Factors, whereas Canbank Factors has a less earning volatility and higher supporting of internal sources in augmenting capital as compared to SBI Factors Ltd Profitability Profitability 9 is an essential objective of a financial institution s funds management. High profits are necessary to pay dividends to stockholders, to build stockholder equity, to offset loan losses, to meet on- going operating 9 Profit (accounting profit) is defined as an excess of income over expenditure. This is an absolute measure of a firm s performance which is not of much significance unless it is seen in comparison to output or resources used to produce output and generate profits. However, the relative performance is considered here as an appropriate measure.

10 Banerjee: Performance Evaluation of Indian Factoring Business 73 expenses, and to expand products and services. The used ratios for measuring profitability are presented in Table 3 and the following inferences have been drawn. Return on Assets (ROA) Ratio SBI Factors Ltd. return on assets (ROA) ratio fluctuates over the period in the range of 2.90 per cent to 5.84 per cent with annual average of 4.16 per cent. For Canbank Factors Ltd., the average of the ROA ratio during the period of analysis is 3.37 per cent; it varies from a minimum of 2.33 per cent in to a maximum 4.13 per cent in Although ROA of SBI Factors Limited shows a positive percentage in all reference years yet average per annum growth rate of ROA and compound growth rate of ROA show negative percentage namely per cent and per cent, respectively. In Canbank Factors Ltd., both the compound growth rate (8.97 per cent) and average per annum growth rate (10.06 per cent) give a positive rate with a positive percentage in each year. It is, therefore, revealed that SBI Factors Limited starts its journey with a better ROA but in the later stages, it achieves a less percentage of ROA. Canbank Factors increases its ROA steadily although it begins with less ROA (2.33 per cent) comparatively. The Mann Whitney s U-test shows that the difference in ROA ratios in each year of SBI Factors Limited and Canbank Factors is not significant Return on Equity (ROE) Ratio Return on equity of SBI Factors Limited increases from 5.54 per cent in to per cent in , whereas it varies from a minimum of per cent in to a maximum of per cent in in case of Canbank Factors Ltd. The average of ROE of SBI Factors Limited during the said period is 9.82 per cent as compared to per cent in the case of Canbank Factors Ltd. The compound growth rate and annual average growth rate of ROE come out to per cent and per cent, respectively, for SBI Factors Limited whereas Canbank Factors Ltd. earns those rates at 6.85 per cent and per cent, respectively. It is, therefore, seen that Canbank Factors accounts for better year-wise ROE as compared to SBI Factors Limited although the latter registers higher compound growth rate. The Mann Whitney s U-test indicates that the difference in ROE of each year of SBI Factors Limited and Canbank Factors over the period of analysis is significant.

11 74 Bank Parikrama Factoring Income to Assets The factoring income 10 to assets ratio varies in the range of 5.54 per cent in to per cent in in the case of SBI Factors Ltd. while for Canbank Factors, it is between 8.77 per cent in and per cent in For SBI Factors Limited, the average factoring income ratio during the period to is 8.82 per cent while it is per cent in the case of Canbank Factors Ltd. The annual average per annum growth rate, and compound growth rate of factoring income to assets of SBI Factors Limited show 7.43 per cent and 7.39 per cent, respectively, whereas these figures come out to 3.91 per cent and per cent, respectively, in the case of Canbank Factors Ltd. Here we find a replicated picture of ROE, as average per annum income gives a better picture for Canbank Factors Ltd. whereas compound growth rate, and average per annum growth rate show a higher rate for SBI Factors Limited. According to U-test there is a difference for each year of the factoring income between SBI Factors Limited and Canbank Factors Ltd. Non-factoring Income as a Percentage of Assets The SBI Factors Ltd. non-factoring income 11 as a percentage of assets decreases sharply from 5.54 per cent in to 0.08 per cent in and its annual average is 2.18 per cent. For Canbank Factors, it increases from 0.22 per cent in to 1.12 per cent in with 0.77 per cent annual average. Considering average per annum growth rate, and compound growth rate, it is found that SBI Factors Limited shows a sharp downward (minus) growth rate whereas Canbank Factors shows a sharp upward growth rate in the case of both average per annum growth rate and compound growth rate. It is due to leasing business introduced by Canbank Factors during the year The Mann Whitney s U test indicates that there is no statistical significant difference between year-wise non-factoring income to assets of SBI Factors Limited and than that of Canbank Factors. 10 Factoring Income: It consists of incomes from finance charges / discount charges, service charges, and processing charges. 11 Non-Factoring Income: It includes profit from short-term investments, profit on sale of fixed assets, interest on inter-corporate deposits, and dividend on units. For Canbank Factors, this includes income from leasing as it has launched leasing service during the year

12 Banerjee: Performance Evaluation of Indian Factoring Business 75 The Dividend Pay out Ratio The dividend payout ratio for SBI Factors Limited has remained more than 50 per cent with annual average of 55.4 per cent during the period of analysis. It is in the range of per cent in to in with annual average of per cent for Canbank Factors Ltd. It is seen that both the factoring companies maintain handsome dividend pay out ratio during the reference period, which confirms sound financial conditions 12 of both of them. But both the companies are following gradually declined dividend ratio as it is seen from the negative compound growth rate, and annual per annum growth rate of both the companies. However, the difference in dividend pay out ratio of SBI Factors Limited and Canbank Factors Ltd. over the period of analysis is significant according to M-W s U-test. In summing up the above analysis relating to profitability of SBI Factors Ltd. and Canbank Factors, it is revealed that performance of Canbank Factors is better than that of SBI Factors Ltd. in the criteria of return on equity, factoring income to total assets, and non-factoring income to total assets whereas return on assets shows almost the same performance. Dividend pay out ratio is higher for SBI Factors Ltd. as compared to Canbank factors. However, in considering compound growth rate as well as average per annum growth rate, it is seen that SBI Factors Limited is gaining a more growth rate in the case of return on equity and factoring income to total assets. Statistical significance of the difference, except in the case of return on assets and non-factoring income to total assets, also confirms the relative performance of profitability of these two factoring companies. Some causes attribute to the better profitability performance of the operation of Canbank Factors Ltd. These are namely: (1) industry- wise exposure is more for Canbank Factors Ltd. as it is funding in around fifteen (15) types of industry whereas SBI Factors Limited operations are limited to only seven types of industry; (2) Canbank Factors has commenced leasing business during the financial year which has opened a new door of the non-factoring income for it; (3) 12 Since dividend pay out policy is determined by a variety of factors such as the earnings, availability of funds, growth cycle, business policy, etc., it reflects a sound financial condition of a financial institution.

13 76 Bank Parikrama Canbank Factors Ltd. accepts the public deposits, and inter- corporate deposits, which might be reducing the interest cost of the company. 4. Lessons For Bangladesh The operational performance of Indian factoring industry is moderate. The business results of both SBI Factors Ltd. and Can bank factors has been achieved a compound growth rate of more than 20 per cent for the factored debt, debt purchase outstanding and collection, respectively during the reference period. Their portfolio of assets is well distributed. However, the Indian industry as a whole have not fared particularly well and there has not been any major increase in new business in terms of its client and customer base.the factoring turnover has reached at US$ 258 million in 1999 after having 9 years operation. The prime explanation of this limited achievement is the small number of players for marketing the service, restricted within recourse factoring only and tendency among factoring companies to consider a potential client from a banker's perspective rather than that of a factor. Factors do their credit assessment by focusing on the client's financial condition rather than collectability of sales ledger of the client. Besides, international factoring is not enough focused till now although its future is bright as their 60 per cent of export (US $ 35 bn) going on non -documentary credit terms. Bangladesh should think in different way for factoring. Effective credit administration as well as powerful and flexible information technology systems must be considered for factoring products which will have to be tailored to meet the specific needs to user (small, medium and large). The SME sector, which accounts for major share of all business groups, should be targeted as key for factoring services. Awareness and understanding of the international factoring service is also need to be promoted to relevant sector of the economy. The Indian factoring companies have scrupulously adhered to the prudent norms as per RBI guidelines for NBFCs. It seems that intervention of RBI has stifled the development of a healthy and dynamic factoring sector. Factoring is still being compared with the commercial banks bill finance or advance against book debts. The most important legal issues like payment of interest for delays, stamp duty, assignment of debts, etc. are yet to be solved. The scope of the domestic factoring is limited within the recourse factoring only. RBI has

14 Banerjee: Performance Evaluation of Indian Factoring Business 77 imposed restrictions on Factoring Companies in raising fund through public deposits and inter- corporate deposit. Factoring organization is not also allowed to raise funds from the Discount and Finance House of India (DFHI) and other approved financial institutions, against their usance promissory notes backed by receivables factored by them. Bangladesh should address the aforesaid issues and take appropriate steps to give a solid foundation for this nascent concept. The factoring companies of India have been maintaining a mixed profit trend since their inception. Although both the companies have done well till , thereafter they have lost their upward trend. The major challenge of Bangladesh over the initial years will be that of widening the market for factoring by expanding its provision more widely across the economy. A focused approach to identify target industry segments and educate them as to the many benefits of factoring will be the critical for the success of factoring industry in Bangladesh. Besides, policy makers and potential providers of the factoring services need to consider some more critical issues in this regard. These issues are likely to be: legal set up; organizational forms, manpower, sources of funds, motivation for investors, and services to be offered 5. Summary of Findings The performance of Indian factoring companies has been improving over time. The compound growth rate of turnover, debt-purchase outstanding, and collection has been found to be noticeable both for the SBI Factors Limited and Commercial Service Ltd. ( per cent, per cent, and per cent, respectively) and Canbank Factors Ltd. (17.77 per cent, per cent, per cent, respectively) during the reference period. The business portfolios of both the companies are well diversified into the auto ancillaries, bulk drugs, cable, automobile, chemicals, distilleries, paper and packaging, textiles, steel, electronics and trading sectors.

15 78 Bank Parikrama The Indian factoring companies included in the present study have adhered to the prudent norms as per Reserve Bank of India s (RBI), guidelines for Non Bank Financial Companies (NBFCs). The capital adequacy ratio of both SBI Factors Limited (37 per cent to 210 per cent) and Canbank Factors (22 per cent to 38 per cent) during the reference period is much higher than the stipulated ratio (12 per cent) prescribed by RBI. They are also careful to tackle risks. The ranges of non-performing assets ratio, and plough back to shareholders equity ratio are from 0.64 per cent to 5.90 per cent, and from per cent to per cent, respectively, for SBI Factors Limited and from 0.08 per cent to 1.64 per cent, and from 8.96 per cent to per cent, respectively, for Canbank Factors during the reference period. However, loan to equity ratio is found high both for SBI Factors Limited ( per cent at the end of ) and Canbank Factors ( per cent at the end of ). The earnings have been more volatile for SBI Factors Limited (1.72 per cent) than that for Canbank Factors (0.85 per cent). The factoring companies continue to earn a mixed profit trend. The performance of Canbank Factors is better than that of SBI Factors Ltd. on the basis of the criteria of return on equity (Can.: from per cent to per cent; SBI: from 5.54 per cent to per cent) and factoring income to total assets (Can: 8.77 per cent to per cent; SBI: 5.54 per cent to per cent). The return of assets ratio shows almost the same percentage, and dividend pay out ratio is higher for SBI Factors Ltd. as compared to Canbank factors. However, in case of compound growth rate, return on equity and factoring income to total assets show a better performance for SBI Factors Ltd. (11.38 per cent, 7.39 per cent, respectively) then those for Canbank Factors (6.85 per cent, per cent, respectively). However, return on assets ratio, non-factoring income to total assets, and divided pay out ratio confirm a negative growth rate for SBI Factors Ltd. (-9.35 per cent, per cent, and 3.07 per cent, respectively) whereas Canbank Factors maintains a positive growth rate for these ratios except dividend payout ratio (8.97 per cent, per cent 5.00 per cent). The Mann Whitney s U-test suggests no statistically significant difference between SBI Factors Ltd. and Canbank Factors in the case of return on assets and non factoring income to total assets while in the case of the other

16 Banerjee: Performance Evaluation of Indian Factoring Business 79 three ratios, namely, return on equity, factoring income to total assets, and dividend pay out ratio, the difference between SBI Factors Limited and Canbank Factors is found statistically significant. Bangladesh should not take a hasty attempt to introduce factoring services without considering pros and cons of the process. An attempt maybe taken to look into various aspects of factoring services such as scope, procedures, organization, funding, pricing, credit rating legal and managerial issues. This attempt will provide a helpful direction top the policy makers, bankers, manufactures and other authorities who will intimately involve for launching factoring services..

17 80 Bank Parikrama REFERENCES Cooper, G. Robert (1995), How to Launch a New Product Successfully? CMA Magazine, Vol. 69, No. 8, October. Green, Brian -Singleton (1993), Big Should be Beautiful, Accountancy, Vol. 111, No. 1197, May. Kuruvilla, George (1999), Factoring in India in Michael Bickers (ed.) : World Factoring Yearbook 1999, London: BCR Publishing In Association with FCI. Kuvalekar, S.V. (1997), Growth of Factoring Business in India: An Appraisal (presented paper in a workshop on Factoring Services held at National Institute of Bank Management, February 7-8). (1997), Pricing of Factoring Service (presented paper in a workshop on Factoring Services held at National Institute of Bank Management, February 7-8.) Orgler, Yair E. and Benjamin Wolkowitz (1976), Bank Capital, New York: Van Nostrand Reinhold Company. Palat, R. Roghu (1989), The Magic of Ratios, Mumbai: Jaico Publishing House. Sengupta, A. K. and S.V. Kuvalekar (1991), Launching Factoring Services in India. Pune: National Institute of Bank Management. Sinkey, Joseph F. (1998), Commercial Bank Financial Management, London: Prentice Hall International, ink. Woelfel, Charles J. (1994), Encyclopedia of Banking and Finance (Tenth Edition), New Delhi: Sultan Chand & Co. Ltd.

18 Banerjee: Performance Evaluation of Indian Factoring Business 81 Annexure - 1 Table 1 : Operational Performance of SBI Factors and Commercial Services Ltd. and Canbank Factors Ltd. (Rs in Crores) Turnover Debt Purchase Outstanding Collection Years SBI Factors and Commercial Services Ltd. Canbank Factors Ltd. SBI Factors Limited and Commercial Services Ltd. Canbank Factors Ltd. SBI Factors and Commercial Services Ltd. Canbank Factors Ltd. Amount Index Amount Index Amount Index Amount Index Amount Index Amount Index Annual average Average per annum growth rate (%) Compound growth rate (%) Note : Base year of index: Amount of factoring volume in Sources: 1. Annual Reports of various years of SBI Factors and Commercial Services Ltd., and Canbank Factors Ltd. 2. Various book-lets of SBI Factors and Commercial Services Ltd., and Canbank Factors Ltd.

19 82 Bank Parikrama Table 2 : Relating to Risk Management of SBI Factors Limited and Commercial Services Ltd., and Canbank Factors Ltd. Years SBI Factors and Commercial Services Ltd. Capital Adequacy Canbank Factors Ltd. Required Kept Required Kept Plough Back to Shareholders Equity SBI Factors and Commercial Services Ltd. Canbank Factors Ltd. Non Performing Assets Ratio SBI Factors Limited and Commercial Services Ltd. Canbank Factors Ltd. SBI Factors and Commercial Services Ltd. (%) Loan to Equity Canbank Factors Ltd N. A N. A Notes: 1. As per the annual report of SBI Factors Limited and Commercial Services Ltd. minimum capital adequacy ratio is 12 per cent whereas this percentage is 15 per cent as per Canbank Factors Ltd s annual report N. A. stands for not available. Sources: 1. Annual reports of various years of SBI Factors Limited and Commercial Services Ltd., and Canbank Factors Ltd. 2. Various book-lets issued by SBI Factors Limited and Commercial Services Ltd., and Canbank Factors Ltd.

20 Banerjee: Performance Evaluation of Indian Factoring Business 83 Table 3 : Ratios Relating to Profitability of SBI Factors and Commercial Services Ltd., and Canbank Factors Ltd. Years Return on Assets Return on Equity Factoring Income to Assets SBI F actors and Commercial Services Ltd. Canbank Factors Ltd. SBI F actors and Commercial Services Ltd. Canbank Factors Ltd. SBI Factor and Commercial Services Ltd. Canbank Factors Ltd. Non factoring Income to Assets SBI Factors and Commercial Services Ltd. Canbank Factors Ltd. (%) Dividend Pay out Ratio SBI Factor and Commercial Services Ltd. Canbank Factor Ltd ND Annual average Average per annum. growth rate Compound growth rate Notes: N.D. stands for not declared. Sources: 1. Annual reports of various years of SBI Factors and Commercial Services Ltd., and Canbank Factors Ltd. 2. Various book-lets issued by SBI Factors and Commercial Services Ltd., and Canbank Factors Ltd