DBS Group Holdings 3Q 2002 Financial Results

Best Trade & Supply Chain Provider
Risk Management in Factoring
Enhancing the Product Scope
Vikas Chandra Jha
Head- Product Management
Trade & Open Account Financing
Disclaimer: The information contained in this document is intended only for use during the presentation and should
not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with
respect to the use of this document or its contents.
The Context: Risk Ladder for Trade Finance
Least secure
Open Account
Most secure
Collection - DA
Collection - DP
Letter of Credit
Confirmed L /C
Advance Payment
Most secure
Least secure
Risks when you trade on Open Account Credit Terms
Delayed payment – Payment is not made quickly resulting in cash being tied up in
receivables, lowering working capital and increasing the risk of technical insolvency
Buyer’s Insolvency risk – The inability of the buyer to honor full payment for goods or
services rendered on due date.
Buyer’s Acceptance risk – The buyer’s non-acceptance of goods delivered or services
Foreign exchange risk – The risk that fluctuations in a currency’s exchange rate from
the contract date to the date of payment will result in lower returns/higher costs
Political/Sovereign Risk – The risk that political changes or instability will cause
complications in the trade. (eg. Goods unable to be imported/exported, payment unable
to be received/made)
Legal risk – Potential for financial loss arising from uncertainty of legal proceeding or
change in legislation such as FX control policy.
Operations Risk- Potential for loss due to discipline of follow up, reconcillaition
Business Context
 2 in 5 Indian suppliers wrote off receivables as
uncollectable due to high collections costs
 Domestic customers of suppliers in India are the slowest
payers in Asia Pacific
 Bankruptcy rates across geography, though in declining
trend is still alarming
 India has highest level of Days Sales Outstanding in
Asia Pacific
 Maintaining Adequate CashFlow is biggest challenge
Source: Atradius Payment Survey 2016
Definition: Accounts Receivable Purchase (ARP) / Factoring
A factor, a Latin word meaning "who/which acts“.
Has differing meanings across fields ( finance, commerce, Mathematics,
Biology , physics and many more)
Open Account Financing Solution – Different from Lending
Is a complete financial package that combines working capital financing,
credit risk protection, accounts receivable bookkeeping and collection
Is different from traditional financing methods such as invoice finance
– ARP is sale / purchase of receivable as against financing of working
capital using receivable as a collateral
– May or may not involve financing
– Financier has legal recourse to buyer
How do I know if ARP is suitable for my business?
Several factors for consideration:
 You are selling goods internationally (as exporter) facing many buyers abroad
 Your goods are not on Consignment Sales basis
 Your sales (receivables) are not to individuals
 Your buyer is not your supplier
 Your sales contracts do not contain any prohibition against assignment
of receivables
Benefits of ARP
Leveraging your Receivables to improve your Working Capital –
how to generate better cash flows!
Days Inventory
Days Sales
Days Payables
Cash Conversion Cycle (CCC)
Managing the Liquidity Risks
Unlock the cash in your receivables for improved cash flows
You Encounter
Factoring solution
Good Source of Working
Shortage in Working
Capital Financing
Working capital is locked
up in receivables
Need to optimize balance
Prepayment of an invoice
for improved liquidityjust in time financing.
Financing in different
currencies for invoicing
across various
Monetizing your
receivables via
conversion from
Accounts receivables
Increases the ability to
offer improved credit
terms to more Buyers,
thus achieving higher
Managing Counterparty Risk- Buyer/ Political
Mitigate risks of Buyers’ insolvency/ protracted default as your sales expand
You Encounter
Factoring Solution
Proactive Credit Risk
Inadequate Credit Risk
Risk of default by the
buyer especially for
export sales
Manage the risk that the
Buyer will fail to pay a
receivable in full other
than by reason of a
Buyer insolvency,
protracted default and
political risks may be
##This refers to Non Recourse ARP arrangements.
Impact on Balance Sheet
and Profit & Loss
through reduced bad
Access to multiple
options for offloading
buyer default risk.
Significant mitigation of
buyer repayment risks
with credit indemnity up
to 100%.
Managing Discipline of Collections
Reduce your Days Sales Outstanding with robust collection of receivables
You Encounter
Factoring Solution
Proactive Collections
Lack of Collections
Tedious and timeconsuming collection
procedures with long
Collecting across time
zones & geographies for
numerous buyers.
Proactive, disciplined
and timely follow up with
buyers for the payment
by the Bank
In-depth understanding
of in-country regulations
and market practices
Discipline in collections.
Reduced DSO.
Better monitoring of
buyer behavior.
Managing Reconciliation/ Ledger Management Risk
Improve visibility in your business with our invoice reconciliation support
You Encounter
Factoring Solution
Robust tracking of Sales
Managing the Sales
Time investment in
managing its sales
ledger and reconciling
payments to receivables.
Lack of visibility in the
Tracking of receivables
and monitoring at an
invoice level.
Robust monitoring
process for buyer
payments and
reconciliation of account
Reconciliation support.
Improved cash flow
forecast and budgeting.
What Industries does DBS cover under Factoring solutions?
Our coverage includes (not limited to) the following:
Shipping &
Electronics &
Wholesale &
Retail Trade
Food & Beverage
and Others…
Thank You
ARP- Regulatory Framework in India
 Was based on Kalyansundaram Committee report ( 1989) to RBI
 First guideline on factoring issued by RBI in 1990.
 The first factoring company – SBI Factors and Commercial Ltd (SBI FACS)
started operation in April 1991.
 The legal guidelines on factoring unfortunately remain weak compared to international
 Government of India has passed Factoring Regulation Act in Dec 2011, to provide
better regulation for the factoring business in the country
 The act gives lenders the following benefits*:
 Upfront Assignment
of Receivables possible now- Stamp Duty on
Assignment is Waived
 Registration of assignment mandatory on central registry- would minimise
double financing of the same receivable
 Requirement of NOC from working capital banker for assignment is not
 This would mean that Banks/ Factor would now have a exclusive and un-
charge on the purchased receivables.
International factoring business grew @ 50% Y-o-Y since the act was passed in
Be mindful of your counterparty risk!
 “Twenty-five U.S. public companies with a combined $56 billion in assets had
filed for Chapter 7 and Chapter 11 bankruptcies through May 26, compared with
33 with $21 billion in assets in the same period last year.”---June 22, 2014. Becky
Yerak, Tribune reporter
 “U.S. bankruptcy filings surged 31 percent in 2008 as both businesses and
consumers struggled to make ends meet in a worsening economy” --- March 5,
2009. Reuters
 “Bankruptcy filings for the 12-month period ending March 31, 2010, rose 27
percent when compared to bankruptcy filings for the 12-month period ending
March 31, 2009, according to statistics released today by the Administrative
Office of the U.S. Courts. March 2010 bankruptcy filings totalled 1,531,997,
compared to the 1,202,395 bankruptcy cases filed in the 12-month period ending
March 31, 2009.” --- May 14, 2010. USCourts.gov
Optimizing Receivables as Top Priority
 Lovetts, a debt-recovery law firm in UK, found that in the first 6 months of 2013,
companies waited 28 days longer before taking the action on outstanding payment
compared with the same period in 2012. Consequently, companies are waiting four
months on average before initiating action on overdue payments.
 The Euro crisis has made more companies focus on the importance of reducing days
sales outstanding (DSO).
 In the corporate market, optimizing receivables is a high priority for many companies.
Source: Banks and corporates seek to optimize receivables from Euromoney in Aug 2013