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A CASE STUDY Setting up a Factoring Operation in

GLOBAL TRADE FINANCE PVT. LTD, INDIA. A CASE STUDY Setting up a Factoring Operation in a Developing Economy. Veena Mankar Warsaw, Poland October 23-24, 2003.

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A CASE STUDY Setting up a Factoring Operation in

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  1. GLOBAL TRADE FINANCE PVT. LTD, INDIA A CASE STUDY Setting up a Factoring Operation in a Developing Economy Veena Mankar Warsaw, Poland October 23-24, 2003

  2. GEARING UP A NEW FACTORING OPERATION • Understanding the Market & Potential • The joint venture approach • Marketing & Product strategies

  3. UNDERSTANDING THE MARKETThe Indian Factoring Market 2000 • Factoring since 1990 • With recourse – predominantly Domestic • 2-3 players – No significant growth until 2000 • No serious international player until 1999 • Stringent regulations • Lack of credit information • Concessional Finance for Exports • Government owned export credit monopoly • LC’s are the norm for international trade

  4. General Perception THIS IS A POOR MARKET FOR FACTORING !!

  5. UNDERSTANDING THE MARKETIndicators of Potential • Significant SME sector • Exports > 55% to developed markets • Significant proportion of “Sell & Forget” products • Increased global competitiveness – Buyers market • Necessity for India to grow exports • Move from LC to open account • WTO pressure to cut export subsidies • BIS capital adequacy norms – Stringent bank credit norms

  6. Developed 64% Medium / High Risk 36% INDIA’S EXPORTS BY COUNTRIES

  7. COMPOSITION OF INDIA’S EXPORTS

  8. UNDERSTANDING THE MARKETWhy had Factoring Failed in India? • No product differentiation from Bank finance • Balance sheet approach – Collateral / With recourse • Fee / Price premium not justified with “Value add” • No clear strategic focus or market segmentation (Regional presence) • Low technology investment • Lack of product knowledge/ risks • Lack of competitive funding services • “Factoring” viewed as a negative product

  9. UNDERSTANDING THE MARKETCompetitive Banking Product -Export Bill Discounting • Concessional Export Finance to Large Priority Clients • SME – only collateralised lending • Export Finance Availability for SMEs a myth • Slow Decision Making • Export Credit Cover – Restrictive • Bill Discounting- Penal Interest for any “delay”

  10. PRE REQUISITES • Reputed parentage to counter “negative” image • International Player to bring “best practices” • Strong domestic presence for reach and early adoption • Regulatory changes - Desirable • Local market expertise – to adapt to local market • Access to Competitive Funding • Therefore : JV between – • International Bank –WestLB • Indian Financial Institution – Exim Bank Of India

  11. One of the leading providers of financial services in Germany • Total assets of more than €350 billion • World wide operating universal bank • AA+ rated by S&P and AAA by Fitch • Market leader in International forfaiting WestLB

  12. Exim Bank • India’s premier export finance institution • The bank facilitates, promotes and finances exports from India.

  13. IFC • Private investment banking arm of the world bank • World’s largest multilateral source of loan and equity financing for private investment in developing countries • India is the largest recipient of IFC’s funding

  14. VALUE OF IFC (WORLD BANK) AS AN INVESTOR • Support creation of enabling regulatory environment • “Balance” between two strong partners • Term financial support • Strengthens promoter/board confidence • Credibility for users • Small and medium sector expertise

  15. THE RIGHT BALANCE – THE JV WAY • Strategic fit of philosophies • Clear leadership with one partner • Shareholders agreement clearly spells out responsibilities • Control through board – decision making process • Executive authority – effective delegation • Risk mitigation – systems and procedures V/s Direct shareholder control

  16. PRE- INCORPORATION INPUTS • Exim Sponsored Feasibility • Product/ Pricing & Competitive Positioning Study • West LB - Risk Policy & Procedures • West LB Evaluated Technology • International Correspondent Relationship Building (FCI/ Coface)

  17. BOARD OF DIRECTORS MD of Exim Bank –Non Executive Chairman of Company Three Directors (including MD) – Nominated by WestLB AG DMD – Nominated by Exim Bank One Independent Director GTF’s board has 6 directors – of whom 2 are whole time directors

  18. DECISION MAKING & RISK MANAGEMENT • Board Approved Risk Policy & Procedures • Risk Committees at Board/ Management Level • Combination of Rating and Appraisal System • Evaluation of Performance and Financial Risk • Non Traditional Information Sources • Independent Concurrent Internal Audit Reports to Board • New Product Introduction Process

  19. MARKETING STRATEGY • Product Strategy • Market Segmentation – to focus in a large market • Client profile • Value add proposition • Education

  20. PRODUCT STRATEGY • Begin with exports –factoring , forfaiting and structured deals • Target SME for regular factoring • Large Corporates – Finance for Growth/ Credit Protection • Add domestic financing products after 1 year with focus on: • Receivables & cash flow control • Existing & New Clients with global competitive ability

  21. USP- SERVICE & VALUE ADD V/s Bank Focus GTF Focus • Balance Sheet approach to lending • Deliver Limits and Price • With recourse • Historical performance • Annual Reviews • Cash Flow approach to lending • Deliver Flexibility & Service • Without / Limited recourse • Orders linked growth • Quick response on Interim Requests

  22. CLIENT PROFILE • Small / Medium / Large • Trader / Manufacturer • New / Track record • Corporate / Non corporate

  23. EDUCATION CREATE AN AWARENESS • Potential Clients • Banks • Complement not compete • Fee Source • Improved risk • Training Institutes- Potential Employees • Regulator

  24. TARGETING POTENTIAL CLIENTS • Direct • Banks/Financial Institutions • Correspondents ( Reverse Marketing) • Intermediaries NOT “LAST RESORT” BUT “PREFERRED OPTION”

  25. FINANCIAL PERFORMANCE (INR 47.50= 1 USD)

  26. OFFICES Head Office – Mumbai (Centralised Operational Activities) 3 Regional Offices ( Primarily for marketing) • Delhi • Bangalore • Chennai

  27. GTF - STRENGTHS • Strong Promoters – Positive Image • Access to Resources - Ratings – P1+/ A1+ short term • Robust Systems & Procedures – Int’l Stds • IT Driven Operations • Cost Efficient Delivery • Risk Management • Multiple Credit Protection Options • FCI • Coface • ECGC • Trained Staff – Focus on internal Training

  28. GOING FORWARD CRITICAL AREAS Portfolio Growth with Asset Quality • Technology Development • Enhance Service • Improved Risk management • Cost Reduction • Industry Lobby • Market development and education • Train – Make it an attractive career option

  29. THANK YOU

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