A STUDY ON THE PERFORMANCE ANALYSIS OF FACTORING SERVICES IN INDIA

A STUDY ON THE PERFORMANCE ANALYSIS OF FACTORING SERVICES IN INDIA Dr. K. N. KALAIVANI Dr. S. Gopalraju Government First Grade College, Anekal, Bangalore 562 106 E-Mail: drkalaivanikn9570@gmail.com ABSTRACT In the present economy, finance is defined as the provision of money at the time when it is required. This is applicable to all type of industries and service organizations to carry operations and to achieve their targets. Hence, finance is highly indispensable and is the life blood of economic activities. Factor, thus offers a clear solution to the enterprises that it provides finance to his client up to a certain percentage of the unpaid invoices which represent the sale of goods or services to approved customers. The main objective of the study is i) to analyze the factoring service performance of Canbank Factors Ltd., and SBI Factors Ltd., ii) to study the significance of the difference in performance parameters between the sample factoring firms. There are two sample units which were selected among seven Factoring companies all over India. Secondary data were collected for a period of 10 years from 1997-98 to 2006-2007, from the annual reports of the study firms, publications, analytical statements and other financial statements. Null hypotheses were framed and tested in this study. KEY WORDS Factoring, Finance, Performance Parameters, Efficiency, Capital Use, Debtors, Receivables, Invoice Discounting, Liquidity, Insolvency, Transactions, Non Banking Financial Companies (NBFC).

INTRODUCTION Finance guides and regulates investment decision and expenditure or they may be about capital expenditure programmers or capital budgeting. To the available funds, any economic transaction consists of buying to selling activities both the activities involve money. So it is true that the financial activity is largely confined to money management. Factoring is one of the important areas which minimize the financial stress of firms. IMPORTANCE OF THE STUDY Corporate performance depends on a number of variables, both internal and external to the company. The major internal factors are efficiency of capital use, productivity of the total employed, growth of gross block and its capacity utilizations, sales turnover and operational efficiency, profitability of the operations, return on capital employed, expansion plans and internal reserves built upon tax planning and accounting practices etc. Trade Credit arises when a firm sells its products or services and does not receive cash immediately. It is an essential marketing tool acting as a bridge for the movement of goods through productions and distribution stage to customers. A firm grants credit to protect its sales from the competitor and to attract the potential customers to buy its products at favourable terms. Trade credit creates accounts receivable or trade debtors. It is referred to as book debts in India. Current assets include substantial portion of debtors. Granting credit and creating debtors amount to the blocking of the firm s funds. The interval between the date of sale and date of payment has to be financed out of working capital. This necessitates the firm to get funds from banks or other sources. Thus, trade debtors represent investment. As substantial amounts are tied up in trade debtors, it needs careful analysis and proper management. FACTORING Selling goods on favorable terms is an important key to achieve growth in the volume of business, with the increase in the volume of production and sales, timely collection and efficient management of receivables has assumed greater importance. A factor provides finance to his client up to a certain percentage of the unpaid invoices which represent the sale of goods or services to approved customers. Factoring as a fund-based financial service, provide resources to finance receivable as well as facilities the collection of receivables. Although such services scenario in the advanced countries, they appeared on the Indian financial sense only in the early nineties as a result of RBI initiatives. Factoring service is of recent origin in India. It owes its genesis to the recommendations of the Shri. Kalyanasundaram study group appointed by the RBI in 1989. Pursuant to the Namex International Journal of Management Research 21 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

acceptance of these recommendations, the first factoring company, SBI factors and commercial Ltd., (SBI FACS) started operation in April 1991. Factoring is also called Invoice Discounting or purchase and discount of receivables. Although these can be with recourse or without recourse, normally the risk is taken by the factoring agent. The discount rate includes the loss of interest, risk of credit and risk of loss of both and principal and interest on the amount involved. STATEMENT OF THE PROBLEM Problems relating to finance are endless and countless. Investment in current assets affects the firm s profitability and liquidity. Current assets management that affects a firm s liquidity is yet another important finance function. Current assets should be managed efficiently for safeguarding the firm against the risk of illiquidity. Lack of liquidity in extreme situations can lead to firm s insolvency. A conflict exists between profitability and liquidity while managing current assets. If the firm does not invest sufficient funds in current assets, it may become illiquid and therefore, risky. It would lose profitability as idle current assets would not earn anything. Cash as an asset, irrespective of the firm in which it is held, is that it does not earn any substantial return for the business. In spite of the fact cash is held by the firm with the many motives. Factoring problems are many. Many banks do not issue letter of disclaimer enabling the purchase of book debts by the factor. This is due to the fact that the banks want their clients should confine to them for their entire borrowings. Normally bankers treat Factors as potential competitors. Reserve Bank of India has imposed various measures on the non banking financial companies. The growth of non banking financial companies has been curtained due to strict imposition of rules and regulations by Reserve Bank of India. Further the banks have to suffer heavily during the period of recession. The cost of operations of Factors is very high and the profitability is limited in most of the cases. The Factors face stiff competition from many banking and non-banking companies. Factoring is not a standalone service product. It is a tripartite arrangement and so the buyers and the banker do not entertain the idea of factoring, perceiving it to be an unwanted interference in their relationship with the seller. The factor has to verify the genuineness of trade transactions, when receivables are presented for financing, the genuineness being verified by checking the invoice and other evidences of delivery. In this context there is a felt need for more credit investigating agencies to recommend genuine business transactions. The network of factoring operations in India is relatively small. In India, some of the banking and financial institutions are providing factoring services to the industrial Namex International Journal of Management Research 22 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

sectors to meet their short term financial requirement. But at the same time factoring services has not been popular as much as other financial services like venture capital, mutual funds and merchant banking. Hence, there is a need to evaluate the role and importance of factoring services in general and understand the service performance of factoring intuitions in particular. Evaluation of the factoring service providing institutions and factoring services world be helpful to both parties of institutions and clients. Ratio of own funds to loan funds does not significantly differ among the study firms; Change in factoring income does not significantly differ among the study firms; Changes in interest expenditure do not significantly differ among the study firms; Rate of change in profit before tax does not significantly differ among the study firms. METHODOLOGY OBJECTIVES OF THE STUDY The prime objectives of the present study are: To trace the history and growth of factoring services; To document the concept of factoring in relation to banking; To examine the factoring service performance of Canbank Factors Ltd; To analyzed the factoring service performance of SBI Factors Ltd; To compare the functions of the sample factoring firms; To identify the problems associated with the factoring and compute the trend in factoring services; To offer suggestions for minimizing the problems and improving the factoring services and its achievements associated. HYPOTHESES The following hypotheses are framed and tested in this study: Sample There are seven factoring companies in India. They are Canbank Factors Limited; SBI Factors and Commercial Services Pvt. Ltd; The Hongkong and Shanghai Banking Corporation Ltd; Foremost Factors Limited; Export Credit Guarantee Corporation of India; Citibank NA, India Small Industries Development Bank of India SIDBI. Among these companies, two companies are operating in Tamil Nadu to greater extent. They are Canbank Factors Limited and SBI Factors and Commercial Services Pvt. Limited. These firms are having their branches in Coimbatore City and in Chennai. In addition, Canbank Factors and SBI Factors are purely in factoring area. Hence these are the prominent companies in Tamil Nadu, that is the Namex International Journal of Management Research 23 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

study area and they are considered as sample for the purpose of this study. Normally research requires both primary and secondary data. This is purely an analytical research and based on the data provided by the annual reports of the companies. Finance data as such are collected mainly from the annual reports of the companies. In case of doubts, the officials are contacted in person and the data are collected. The data are classified and analyzed as per various financial accounting principles and as opined by the officials of the firms. Research Methodology is the way to systematically solve the research problem. The present study is an analytical study and requires mainly secondary data. Additional Secondary data are collected from various websites, books, and publications of Journals, research publications and other published and unpublished records. The secondary data relating to performance of SBI factors commercial Ltd., and Canbank Factors are collected from records of SBI factors and commercial Ltd., and Canbank Factors. angles. Tools such as t test, f test, multiple regression and other statistical tools are also used to identify the relationship between multiple variables. AREA OF THE STUDY The study considers only two factoring firms. They are SBI Factors Ltd and Can Bank Factors Limited. Both firms are subsidy firms of nationalized banks and the area of study is the entire nation. SCOPE OF THE STUDY Various research studies have been conducted in the field of banking and finance and there are very few studies in the field of factoring. The present study is analyzing the history and growth of factoring services and the concept of factoring. The various types of services offered by study firms are analyzed and the functions of compared. The analysis, finding and suggestions will help the firms to have better understanding of the environment and the possibility of improving productivity and profitability in the organizations. TOOLS USED: Analysis of data is done with various statistical tools. Simple tools such as ratios, percentages and Index numbers are used. Tools such as standard Deviation, co-efficient of variation, growth rate, correlation regression etc., are used for in-depth analysis of financial data. Various financial ratios are utilized and the data are analyzed from various Factoring is a newly developing concept and the number of firms engaged in this field is few. The present study has given an outline for analyzing various concepts and functions of factoring firms. The study can help the firms in identifying the gaps and omissions in their services. Their performance analysis may show the methods for improving their quality of service and can attract more customers in this field. Factoring has Namex International Journal of Management Research 24 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

reduced the risk of many business firms at a reasonable cost. Hence the present study can help new firms in deciding their services to large number of customers. The study will provide ways and means for new entrepreneurs for entering into the field of factoring. They can get information on the operating cost, profitability and various other financial details from the analysis done in this study. PERIOD OF THE STUDY Secondary data are collected for a period of 10 years from 1997-98 to 2006-07. The data are collected from the annual reports of the companies. Some data are collected from the publications and analytical statements. Some of the data relating to the period 2006-07 have been collection from publications and other financial statements. However, it is ensured that data are collected for a period of ten years for the purpose of the study. LIMITATIONS OF THE STUDY The study is an analytical study and purely depending on secondary data. Many officials have shown reluctance in providing financial data due to the fact that the competition is very high in this field. The study firms have not provided data relating to their clients and their addresses. In spite of repeated visits, only a few clients could be met. The clients refused to provide any data relating to factoring. Hence the opinion of clients could not be collected and analyzed. Only two firms are considered. Other firms are very small in relation to volume of transactions and could not be compared with the study firms. The factoring firms are very much limited in India and hence only two firms are considered for the purpose of this study. SOME OF THE IMPORTANT FINDINGS: OWN FUNDS AND CURRENT ASSETS & OTHERS Current Assets and others in the company are compared with that of own funds. Current assets includes cash and those assets which can be easily converted into cash within a short period of time generally, one year, such as client pre payment account, cheque realizable at outstation, debts purchased account, petty cash, rent advance to premises and loan receivables. The relationship between own funds and current assets are studied and shown in Table 1 for analysis. Own Funds to Current Assets and others = Own Funds / Current Assets and others Namex International Journal of Management Research 25 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

TABLE No. 1 - OWN FUNDS AND CURRENT ASSETS & OTHERS CANBANK FACTORS (Rs. in Cores) Year Own Funds Trend Percentage Current Assets and others Trend Percentage Ratio 1997-98 31.42 100.00 142.08 100.00 0.22 1998-99 35.47 112.89 186.84 131.50 0.19 1999-00 39.29 125.05 136.92 96.37 0.29 2000-01 43.19 137.46 172.13 121.15 0.25 2001-02 47.64 151.62 186.71 131.41 0.26 2002-03 54.29 172.79 222.75 156.78 0.24 2003-04 62.42 198.66 292.13 205.61 0.21 2004-05 71.61 227.91 416.92 293.44 0.17 2005-06 79.48 252.96 538.30 378.87 0.15 2006-07 82.35 262.09 658.81 463.69 0.12 TOTAL 547.16 2953.59 MEAN 54.72 295.36 SD 18.43 182.13 CV 33.68 61.66 GROWTH 11.30 18.58 CORRE 0.94 Source : Records of Canbank Factors Ltd Table 1 shows the data relating to own funds and current assets and others of Canbank Factors Ltd., It is found that current assets and others during 1997-98 is Rs.142.08 crores and it has increased to Rs.186.71 crores. Again, it has increased to Rs.658.81 crores in 2006-07. Trend percentages are calculated by taking 1997-98 as the base year. The trend percentage for current assets and others in 2001-02 is 131.41 and for 2006-07 is 463.69. The increase in current assets and others is around 363 percent during the study period. The ratio of own funds to current assets and others is calculated. The ratio during 1997-98 is 0.22; in 2001-02 is 0.26 and in 2006-07 is 0.12. There are fluctuations in this ratio and is the highest in the year 1999-2000. The mean current assets and others is Rs. 295.36 crores and standard deviation is Rs.182.13 crores. The coefficient of variation of own fund is 33.68 and that of current assets and others is 61.66. The growth rate is calculated and it is found that the growth rate for own funds is 11.30 and current assets and others is 18.58. Correlation is calculated and it is +0.94. This shows that there is positive relationship between own funds and current assets and others. It is inferred that the increase in current assets and others is higher than that of own funds. The ratio of own funds to current assets and others is significantly declining. The co-efficient of variation is higher in the case of current assets and others than that of own funds. OWN FUNDS AND FACTORING INCOMES Factoring incomes in the company are compared with that of own funds. Factoring incomes is the sum of interest Namex International Journal of Management Research 26 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

charges and discount charges. The relationship between own funds and factoring incomes are studied and shown in Table 2 for analysis. TABLE No. 2: OWN FUNDS AND FACTORING INCOMES CANBANK FACTORS LTD., (Rs. in Crores) Year Own Funds Trend Percentage Factoring Incomes Trend Percentage Ratio 1997-98 31.42 100.00 11.83 100.00 2.66 1998-99 35.47 112.89 13.64 115.30 2.60 1999-00 39.29 125.05 17.30 146.24 2.27 2000-01 43.19 137.46 18.99 160.52 2.27 2001-02 47.64 151.62 20.44 172.78 2.33 2002-03 54.29 172.79 23.75 200.76 2.29 2003-04 62.42 198.66 28.21 238.46 2.21 2004-05 71.61 227.91 31.57 266.86 2.27 2005-06 79.48 252.96 38.53 325.70 2.06 2006-07 82.35 262.09 41.55 351.23 1.98 TOTAL 547.16 245.81 MEAN 54.72 24.58 SD 18.43 10.16 CV 33.68 41.33 GROWTH 11.30 14.98 CORRE 0.99 Source : Records of Canbank Factors Ltd Table 2 shows that the data relating to own funds and factoring incomes of Canbank Factors Ltd. It is found that factoring incomes during 1997-98 is Rs.11.83 crores and it has increased in 2001-02 to 20.44 crores. Again it has increased to Rs.41.55 crores. Trend percentages are calculated by taking 1997-98 as the base year. The trend percentage for factoring incomes in 2001-02 is 172.78 and for 2006-07 is 351.23. The increase in factoring incomes is around 251 percent during the study period. The ratio of own funds to factoring incomes is calculated. The ratio during 1997-98 is 2.66; in 2001-02 is 2.33 and in 2006-07 is 1.98. The ratio is fluctuating throughout study period and is the highest in the year 1997-98. The mean factoring incomes is Rs.24.58 crores and standard deviation is Rs.10.16 crores. The co-efficient of variation of own funds is 33.68 percent and that of factoring incomes is 41.33 percent. The growth rate is calculated and it is found that the growth rate for own fund is 11.30 and factoring incomes is 14.98. Correlation is calculated and it is +0.99. This shows that there is a very high positive correlation between own funds and factoring incomes. It is inferred that the increase in own funds is higher than that of factoring incomes. The ratio of own funds to factoring incomes is fluctuating. The co-efficient of variation is higher in the case of factoring incomes than that of own funds. Growth rate is higher in the Namex International Journal of Management Research 27 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

case of factoring incomes than that of own funds. OWN FUNDS AND CURRENT LIABILITIES AND OTHERS Current liabilities are those obligations which are payable within a short period of generally one year and includes borrowed loans, tax payable, tax deducted at source payable, service tax payable, main office account, salary payable to employees and leave salary. Current liabilities and others are compared with that of own funds. The ratio of Own Funds and Current liabilities and others are calculated and shown in Table 3 for analysis. Table 3 shows the data relating to own funds and current liabilities and others of SBI Factors. It is found that current liabilities and others during 1997-98 is Rs.48.54 crores and it has decreased in the year 2001-02 to Rs.29.98 crores. But, it has slightly increased to Rs.23.65 in 2006-07. Trend percentages are calculated by taking 1997-98 as the base year. The trend percentages for current liabilities and others in 2001-02 is 61.76 and for 2006-07 is 48.72. The decrease in current liabilities and others is around 52 percent during the study period. The ratio of own funds to current liabilities and others is calculated. The ratio during 1997-98 is 0.66; in 2001-02 is 1.22 and in 2006-07 is 3.93. There are fluctuations in this ratio and it is the highest in the last year of study, 2006-07. TABLE No. 3: OWN FUNDS AND CURRENT LIABILITIES AND OTHERS SBI FACTORS (Rs. in crores) Year Own Funds Trend Percentage Current Liabilities and others Trend Percentage Ratio 1997-98 32.11 100.00 48.54 100.00 0.66 1998-99 33.20 103.39 45.08 92.87 0.74 1999-00 35.27 109.84 43.10 88.79 0.82 2000-01 35.57 110.78 42.50 87.56 0.84 2001-02 36.57 113.89 29.98 61.76 1.22 2002-03 38.79 120.80 38.03 78.35 1.02 2003-04 38.97 121.36 41.47 85.43 0.94 2004-05 42.81 133.32 58.84 121.22 0.73 2005-06 86.18 268.39 64.35 132.57 1.34 2006-07 93.04 289.75 23.65 48.72 3.93 TOTAL 472.51 435.54 MEAN 47.25 43.55 SD 22.59 12.06 CV 47.81 27.70 GROWT H 12.55-7.68 CORRE -0.02 Source Records of SBI Factors Namex International Journal of Management Research 28 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

The mean current liabilities and others is Rs. 43.55 crores and standard deviation is Rs.12.06 crores. The coefficient of variation of own funds is 47.81 percent and that of current liabilities and others is 27.70 percent. The growth rate is calculated and it is found that the growth rate for own funds is 12.55 and current liabilities and others is -7.68. Correlation is calculated and it is -0.02. This shows that there is a very low negative relationship between own funds and current liabilities and others. It is inferred that the increase in current liabilities and others is less than that of own funds. The ratio of own funds to current liabilities and others is significantly fluctuating. The coefficient of variation is less in the case of current liabilities and others than that of own funds. Growth rate is less in the case of current liabilities and others than that of own funds. OWN FUNDS AND FACTORING INCOMES Factoring incomes in the company are compared with that of own funds. Factoring incomes is the sum of interest charges and discount charges. The relationship between own funds and factoring incomes are studied and shown in Table 4 for analysis. Year TABLE No. 4: OWN FUNDS AND FACTORING INCOMES SBI FACTORS (Rs. in crores) Own Funds Trend Percentage Factoring Incomes Trend Percentage Ratio 1997-98 32.11 100.00 11.97 100.00 2.68 1998-99 33.20 103.39 12.34 103.09 2.69 1999-00 35.27 109.84 13.96 116.62 2.53 2000-01 35.57 110.78 13.25 110.69 2.68 2001-02 36.57 113.89 12.99 108.52 2.82 2002-03 38.79 120.80 12.66 105.76 3.06 2003-04 38.97 121.36 13.94 116.46 2.80 2004-05 42.81 133.32 23.33 194.90 1.83 2005-06 86.18 268.39 60.80 507.94 1.42 2006-07 93.04 289.75 95.13 794.74 0.98 TOTAL 472.51 270.37 MEAN 47.25 27.04 SD 22.59 28.23 CV 47.81 104.39 GROWT H 12.55 25.90 CORRE 0.97 Source : Records of SBI Factors It is observed from the Table 4 that the data relating to own funds and factoring incomes of SBI Factors. It is found that factoring incomes during 1997-98 is Rs.11.97 Crores and it has increased in 2001-02 to 12.99 crores in 2006-07. Namex International Journal of Management Research 29 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

Again it has increased to Rs.95.13 crores. Trend percentages are calculated by taking 1997-98 as the base year. The trend percentage for factoring incomes in 2001-02 is 108.52 and for 2006-07 is 794.74. The increase in factoring incomes is around 694 percent during the study period. The ratio of own funds to factoring incomes is calculated. The ratio during 1997-98 is 2.68; in 2001-02 is 2.82 and in 2006-07 is 0.98. The ratio is fluctuating and is the highest in the year 2002-03. The mean factoring incomes is Rs.27.04 crores and standard deviation is Rs.28.23 crores. The co-efficient of variation of own funds is 47.81 per cent and that of factoring incomes is 104.39 percent. The growth rate is calculated and it is found that the growth rate for own fund is 12.55 and factoring incomes is 25.90. Correlation is calculated and it is +0.97. This shows that there is a very high positive relationship between own funds and factoring incomes. It is inferred that the increase in factoring incomes is less than that of own funds. The ratio of own funds to factoring incomes is significantly declining. The co-efficient of variation is higher in the case of factoring incomes than that of own funds. Growth rate is higher in the case of factoring incomes than that of own funds. CONCLUSION It is found that change in factoring income does not significantly differ among Canbank factors and SBI factors. The ratio of own funds to interest expenditure does not significantly differ among Canbank factors and SBI factor. Analysis reveals that ratio of own funds to profit before tax does not significantly differ among Canbank factors and SBI factors. BIBLIOGRAPHY BOOKS Avadhani.V. A. (2002), Marketing of Financial Services Himalaya Publications, Mumbai. Baig, N. and Khan, M.A.A.(1990), Entrepreneurship and Business Environment, Balajit Singh. (1961), The Economics of SSI, A case study of SSI establishments of Moradabad, Asia Publishing House, London. Balakrishnan,G.(1961), Financing Small Scale Industries in India, Asia Publishing House, Bombay. Balakrishnan. G (1963), Financing small Industries in India - 1950 52, Asia Publishing House, Bombay. Balu.V (2004), Financial Services to SSI sector, Deep & Deep Publications, New Delhi. Chawla, A.S., (1987), Nationalisation and Growth of Indian Banking, Deep and Deep Publications, New Delhi. JOURNALS AND PERIODICALS Namex International Journal of Management Research 30 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076

Aboudha,C(1996), Small-scale industrial financing in Kenya; Case for venture capital, In D.McCormick & P.O. Pedersen (eds), Small Enterprises; Flexibility and Net working in an African Context (pp.193-212) Nairobi: Oxford University Press. Anil Kumar. (2006), Structure of Enterprises owned by Women Entrepreneurs, The Indian Journal of Commerce, Vol. 59., No.1. Anup Agarwal and Nandu J. Nagarajan, Corporate Capital Structure, Agency Costs, and ownership control-the case of all-equity firms, The journal of Finance, Vol. XLV, No.4, pp. 1325 1331. Namex International Journal of Management Research 31 Vol. 3, Issue 1, Jan June 2013. ISSN 2250-2076