Table 1.1 TOTAL FACTORING VOLUME BY COUNTRY IN THE LAST 10 YEARS (MILLIONS OF EUROS)

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1 INTRODUCTION Factoring is a financial option for the management of receivables. In simple word it is the conversion of credit sales into cash. In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and pays up to 80% (rarely up to 90%) of the amount immediately on agreement. Factoring company pays the remaining amount (Balance 20%- Finance cost-operating cost) to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client depending upon the type of factoring. We will see different types of factoring in this article. The account receivable in factoring can either be for a product or service. Examples are factoring against goods purchased, factoring for construction services (usually for government contracts where the government body is capable of paying back the debt in the stipulated period of factoring. Contractors submit invoices to get cash instantly), factoring against medical insurance etc. Table 1.1 TOTAL FACTORING VOLUME BY COUNTRY IN THE LAST 10 YEARS (MILLIONS OF EUROS) Years Countries Europe 468, , , , , , , , ,649 1,045,069 Americas 127, , , , , , , , , ,357 Africa 5,801 6,203 5,840 7,586 6,237 8,513 10,705 13,263 14,796 16,686 Asia 76,078 69,850 89, , , , , , , ,602 Australasia 8,320 9,992 13,979 18,417 23,380 27,853 33,780 33,246 40,110 45,515 Total World 685, , , ,215 1,016,547 1,134,288 1,299,127 1,325,111 1,283,559 1,648,229 Source: World Factoring Yearbook 2011-Published by BCR Publishing Ltd. 3 Cobden Court, Wimpole Close, Bromley, Kent, BR2 9JF, UK sponsored by Factors Chain International (FCI), an Umbrella Organisation of Factoring Companies. 0

2 The above chart shows that in the Year 2007 Total Factoring business has increased to 1,299,127 from 685,682 in 2001 indicating the growth of 89.46% Approx. registering the growth of 12.78% Approx. p.a. Similarly in Asia during the Year 2007 total factoring business has increased to 174,667 from 76,078 in 2001 indicating the growth of %. During the Year 2007 in Australasia the total factoring business rose to 33,780 Euro Millions from 8,320 Euro Millions in 2001 indicating the growth of 306% Approx. registering the growth of 43.72% Approx. p.a. Further, the above table shows that the total factoring business in the world which is 12.78% Approx. p.a., whereas the total factoring business in Asia is 18.51% Approx. p.a. It may be concluded that the scope of factoring business is higher than the total factoring business in the world. However, in the year 2009, the total factoring business of the world declined by 2.91% to 1,283,559 Euro millions. This decline was due to economic recession throughout the world. However in Asia the total factoring business declined by 10.84% to 235,512 Euro millions. In Asia in the Year 2010 total factoring business has increased to 355,602 Euro millions from 209,991 Euro millions in 2009 indicating the turbulent growth of 69.34% Approx. It may be concluded that in Asia the factoring business is growing at very fast rate as compared to total world factoring business. Finally, the total factoring business of the world during the year 2010 increased by 28.41% to 1,648,229 Euro millions. It may be concluded that despite economic recession throughout the world the factoring business have shown a positive impact on its growth. It may also be concluded that the development of factoring business in Asia is Approx. 52% whereas in the world it is 26.87%. FACTORING AND ITS IMPORTANCE TO SME S Factoring is one of the most important sources of working capital to Small and Medium Enterprises registered in India. However, the same is not being availed by SME s due to one reason or the others. In developed countries of the world SME s are financed only through factoring companies for their working capital requirements. In other words, large sized companies are allowed to borrow from banks, financial institutions and other sources. Whereas in Asian countries including India SME s are generally borrows from banks and financial institutions. SME s is being backbone of large sized companies; it requires attention of the bankers, financial institutions, Reserve Bank of India, Ministry 1

3 of Finance etc. Through this research I will try to find out the reasons why its (Factoring) is not so popular in India, especially in Mumbai? This topic has encouraged me to find out the problems associated with factoring. Factoring finance was originally introduced to finance Small and Medium Enterprises to meet their working capital requirements. In some of the Advanced and Developed Countries the Small and Medium Enterprises are financed through factoring facilities only. In other words banking and financial institutions are not involved in financing the Small and Medium Enterprises. It is only the factoring companies which help the Small and Medium Enterprises in meeting their working capital requirements. In India if the Small and Medium Enterprises are financed through factoring business, there would be reminders amount of industrial growth and the growth of the factoring companies. The total factoring businesses in India are Approx. Rs. 35,500 Crores. (Source: World Factoring Year Book 2009). According to Mr. K V Kamath, Non-Executive Chairman Infosys Ltd. the next decade will belong to the Small and Medium Enterprises as the growth will move to the hinterlands in future. "Our growth momentum and transformation in terms of being a very large consumer-driven economy means that the next decade is going to be the SMEs because without their support large companies cannot grow. It provides a virtuous cycle in terms of growth," Kamath said at a meet on SMEs organized by Indian Merchants' Chamber and the BSE here. Admitting that the SME sector needs a slew of support to sustain itself and grow, he said they need technology, modern management practices and easy capital. Pointing out that the economy is driven by rural India, which constitute small businesses, agri, value-added businesses, apart from services, he said, "there are whole host of businesses riding on agriculture and going beyond agriculture which are driving rural India.And these are all driven by Small and Medium Entrepreneurs." The country used to depend on up to 50% on agriculture as it made up for half the GDP. However, the contribution of agriculture has now plunged to 10-20%, Kamath said. One of the major problems of the Small and Medium Enterprises is shortage of finance and inefficient administration of financial planning. Another most important challenge before the Small and Medium Enterprises how to minimize the bad debts. If the factoring finance / facilities are made mandatory to the Small and Medium Enterprises, both these problems could be resolved easily. This 2

4 would be possible only if the regulators of factoring finance frame appropriate policies for the development of the Small and Medium Enterprises and factoring companies. The factoring facilities could become a blessing to the Small and Medium Enterprises if the government pays suitable and appropriate attention for the development of the Small and Medium Enterprises. Perhaps the Small and Medium Enterprises / MSME are the most neglected sector by both the government as well as entrepreneurs. However, if we look at the performance in the country, this has become the leading contributory in the economy progress of the country. In fact, this has become the backbone of the large size industries. These units contribute approximately 95% of the industrial units in India. At the same time these units are scattered and fragmented throughout India. The Small and Medium Enterprises / MSME sector manufactures approximately 8000 products. Small and Medium Enterprises / MSMEs contribute about 8% of the GDP of the country. The contribution of Small and Medium Enterprises / MSME in the industrial development is approximately 45%. It also contributes approximately 40% of the exports of manufactured goods. It also contributes 45% of the industrial employment in India. Majority of the Small and Medium Enterprises / MSME are situated in rural areas and caters the need of 75% of the Indian population who lives in villages. Looking at the problems of factoring companies in India recently the government of India has passed The Factoring Regulation Act, 2011 (No. 12 of 2012) dated The enactment of this Act would certainly boost the factoring business in India. WHAT IS SME S? SME s stand for Small and Medium Enterprises. According to Micro, Small and Medium Enterprise Development Act, 2006 ( MSMED ) which came into force w.e.f. 2 nd October, 2006 which has repealed the provision of the old Act regarding SSI Undertakings. As per Micro, Small and Medium Enterprise Development Act, 2006 ( MSMED ) the suppliers of goods and services are to be classified into Micro, Small and Medium Enterprises. The MSMED Act applies irrespective of whether the supplier is a Company, Partnership Firm, Association of Person or HUF. The definition of Micro, Small and Medium Enterprises as given in the MSMED Act are as under: 3

5 CLASSIFICATION OF ENTERPRISES ENGAGED IN:- a) Manufacture or production of goods pertaining to any industry specified in the First Schedule to the IDRA as Nature of Enterprises Investment in Plant & Machinery (#) Micro Less than INR 25 Lacs Small More than INR 25 Lacs less than INR 5 Crores Medium More than INR 5 Crores but less than INR 10 Crores b) Providing or rendering services Nature of Enterprises Investment in Plant & Machinery Micro Less than INR 10 Lacs Small More than INR 10 Lacs less than INR 2 Crores Medium More than INR 2 Crores but less than INR 5 Crores (#) In calculating the investment in plant and machinery the cost of pollution control research and development, industrial safety devices will be excluded. This is to convey the rationale of your proposed work, and should give a background setting which has prompted / encouraged you to do this work. Some studies and data must support this. IMPORTANCE / ROLE / SIGNIFICANCE OF SME s Small-scale industries play an important role in process of country s industrial development. It accounts for 40% of the total value of industrial production and contributes directly about 33% of aggregate exports. In a developing country like India it is a small scale industry that constitutes the backbone of the industrial structure. Its development has created vast employment opportunities and has also brought about decentralization. 4

6 PROBLEMS OF SME S Though SME s are backbone of large scale industries, still it suffers from many problems. Some of these problems are includes lack of capital, inefficient man power, poor technology, poor quality production, power supply, problem of marketing, distribution problems, inefficient financial management and so on. If we analyses the above problems, majority of these problems (say upto 90%) are connected directly or indirectly with finance. 5