A major comparison has been made between SBI and HSBC as regards the factoring service and another comparison has been made between HSBC and Standard Chartered bank as regards the business credit. These banks have been chosen for comparison on the basis of their excellence in the respective areas. The key learning from the project was the knowledge of the factoring service and the processes involved, which is still at nascent stage and expected to grow at a rapid pace. I tried to channelize my efforts towards learning the practical aspects of it so as to be able to contribute to the industry in future. INTRODUCTION
The Small and Medium Enterprises (SMEs) are of immense importance for the social and economic development of any economy. They significantly account for the gross domestic product of a country. But still majority of the Asian countries are suffering from underdeveloped SMEs. Though all firms face financial constraints, but as far as the SMEs are concerned, the picture is quite diverse and worse than other organizations. Few major reasons for this can be attributed to the dearth of finance, defective economic system, and imperfect financing and investment. As far as defining the SME is concerned, no common pedestal exists.
In some countries, it may be defined on the basis of scale of operations; while in others, the capital base or number of employees may be considered. In India, the SME has been defined on the basis of investment in plant and machinery at its historic value and the limit of investment keeps on changing from time to time. SME in India can be said to have rallied the expectations, in terms of achieving the objectives set forth. The availability of external finance for SMEs has been a topic of considerable interest to academics, and an issue of great importance to policymakers, around the globe.
SMEs are considered vital for the role that they play in the development of an economy, which is important for an economy’s success. SMEs represent the model involving a well mix of both labour and capital intensive techniques and traditional and modernized techniques. However, the policymakers are still not giving the SMEs the desired recognition while planning, despite of its well known importance. The major area where the SMEs face problem is the availability of finance, and some of the reasons cited for this bottleneck include, less market credibility, insufficient information, lack of innovative options, etc.
This puts up the need of rigorous approach for developing the SMEs. To promote the SMEs, RBI has issued certain guidelines whereby Advances to Small and Medium enterprises sector will be reckoned in computing performance under the overall priority sector target of 40 per cent of Net Bank Credit (NBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher for domestic commercial banks and 10 per cent of NBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.
The project undertaken is to study the financial support to SMEs from HSBC in the form of working capital finance. This includes the study of procedures of business credit and the debtor financing. This project would thus help in giving an insight as to what actually is happening in the industry and what more needs to be done. REVIEW OF LITERATURE HSBC launches factoring services for SMEs Our Bureau |The factoring charges for a local trader would vary between 9 and 11 per cent, inclusive of interest cost, credit insurance and collection charges and also | |depend on customer's profile. |
Mumbai , Aug. 23, 2006 HSBC has launched factoring services for small and medium-sized enterprises (SMEs). The bank will offer SMEs with a minimum turnover of Rs 5 crore and a maximum of Rs 50 crore, a range of factoring products that support both international and domestic trade. Factoring addresses the need of exporters or sellers to avail themselves of pre-finance on receivables for their working capital requirements. Mr Bhriguraj Singh, Senior Vice-President and Head Factoring, HSBC, said that the key constraint for small companies in India was securing and managing working capital.
Factoring was significant for exporters because they are required to extend liberal open account terms of sales to their customers and also since international buyers are unwilling to enter letter of credit based transactions due to the additional monetary and administrative costs involved, he said. HSBC has been offering factoring services to corporate customers for the past five years. The bank has 250-300 corporate customers and the business currently contributes 5-10 per cent of the total lending. HSBC has so far roped in about 15-20 customers from the SME segment.
Mr Subir Mehra, Head-Commercial Banking, HSBC, said that globally, factoring had default rates lower than that of routine lending. He also said that internationally, the bulk of factoring services was offered to SMEs. The factoring charges for a local trader would vary between 9 per cent and11 per cent, inclusive of interest cost, credit insurance and collection charges. "The charges would vary depending on the risk profile of the customer and the buyer," said Mr Singh. In terms of its total lending business, HSBC currently has around 35-40,000 customers from the SME segment.
Factoring Around the World Innovative financing mechanisms have been prescribed often as a solution for the credit-deprived small businesses in India. And a growing trend is now visible where financial service providers are finding it attractive to offer what is known as factoring services to small and medium enterprises (SMEs). Existing major factoring service providers as well as new entrants are rushing in to tap the SME segment with much optimism about the growth potential of this business opportunity.
Factoring is a system with multi line of services for purchasing commercial accounts receivable (invoices) from a business at a discount. Factoring can include financing short-term receivables, providing credit protection against bad debts (thus leading to limited recourse to the seller), collecting payment proceeds and managing sales ledgers. According to Factors Chain International (FCI), factoring services worldwide has experienced a growth rate 100% in the last 5 years. Growth in international trade has provided the growth impetus for the industry.
In India, however, it is still in a nascent stage. The volume of the Indian factoring industry is only 0. 2% of the world over volumes. The total volume of export factoring industry was about $225 million in 2004, as compared to the $1,100 billion sized global market and has been projected to attain a growth rate of 20% per annum. Quick Take • Factoring involves purchase of receivables (invoices) of a business at a discount • Service providers don’t look at balance sheets, but at a unit’s cash flows • The service is a one-stop solution that improves cash flows and covers risk
As the SME sector contributes as much as 45-50% of the country’s exports, it is this segment that has acquired significance as the target for factoring service providers. Commenting on the industry’s growth prospects, Arvind Sonmale, managing director ; CEO, Global Trade Finance Pvt Ltd (GTFL) said, “Considering the importance of the SME segment in the economy, we can see a tremendous growth potential in the segment. The main advantage for factoring services providers, as compared to banks, is that we do not need to look at the balance sheet of the companies in question for credit.