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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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slide1

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

slide2

GEARING UP A NEW FACTORING OPERATION

  • Understanding the Market & Potential
  • The joint venture approach
  • Marketing & Product strategies
slide3

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
slide4

General Perception

THIS IS A POOR MARKET FOR FACTORING !!

slide5

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
slide6

Developed 64%

Medium / High Risk 36%

INDIA’S EXPORTS BY COUNTRIES

slide8

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
slide9

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”
slide10

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
westlb

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
slide12

Exim Bank

  • India’s premier export finance institution
  • The bank facilitates, promotes and finances exports from India.
slide13

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
slide14

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
slide15

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
slide16

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)
slide17

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

slide18

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
slide19

MARKETING STRATEGY

  • Product Strategy
  • Market Segmentation – to focus in a large market
  • Client profile
  • Value add proposition
  • Education
slide20

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
slide21

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
slide22

CLIENT PROFILE

  • Small /

Medium

/ Large

  • Trader /

Manufacturer

  • New /

Track record

  • Corporate / Non corporate
slide23

EDUCATION CREATE AN AWARENESS

  • Potential Clients
  • Banks
    • Complement not compete
    • Fee Source
    • Improved risk
  • Training Institutes- Potential Employees
  • Regulator
slide24

TARGETING POTENTIAL CLIENTS

  • Direct
  • Banks/Financial Institutions
  • Correspondents ( Reverse Marketing)
  • Intermediaries

NOT “LAST RESORT” BUT “PREFERRED OPTION”

slide25

FINANCIAL PERFORMANCE

(INR 47.50= 1 USD)

slide26

OFFICES

Head Office – Mumbai (Centralised Operational Activities)

3 Regional Offices ( Primarily for marketing)

  • Delhi
  • Bangalore
  • Chennai
gtf strengths
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
slide28

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