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 Seller Least secure Buyer Open Account Most secure Collection - DA Collection - DP Letter of Credit Confirmed L /C Advance Payment Most secure Least secure 2 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 rendered. 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 mismatches 3 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 4 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 services 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 5 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 6 Benefits of ARP Leveraging your Receivables to improve your Working Capital – how to generate better cash flows! Days Inventory Outstanding (DIO) = + Days Sales Outstanding (DSO) - Days Payables Outstanding (DPO) Cash Conversion Cycle (CCC) 7 Managing the Liquidity Risks Unlock the cash in your receivables for improved cash flows You Encounter Factoring solution Good Source of Working Capital Shortage in Working Capital Financing Working capital is locked up in receivables Need to optimize balance sheet. Prepayment of an invoice for improved liquidityjust in time financing. Financing in different currencies for invoicing across various geographies. Benefits Monetizing your receivables via conversion from Accounts receivables Increases the ability to offer improved credit terms to more Buyers, thus achieving higher sales Managing Counterparty Risk- Buyer/ Political Mitigate risks of Buyers’ insolvency/ protracted default as your sales expand You Encounter Factoring Solution Proactive Credit Risk Management Inadequate Credit Risk Management## 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 dispute. Buyer insolvency, protracted default and political risks may be covered. ##This refers to Non Recourse ARP arrangements. Benefits Impact on Balance Sheet and Profit & Loss through reduced bad debts 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 Management Lack of Collections Management Tedious and timeconsuming collection procedures with long DSOs. 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 Benefits 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 Ledger Managing the Sales Ledger Time investment in managing its sales ledger and reconciling payments to receivables. Lack of visibility in the business. Tracking of receivables and monitoring at an invoice level. Robust monitoring process for buyer payments and reconciliation of account receivables Benefits Reconciliation support. Improved cash flow forecast and budgeting. What Industries does DBS cover under Factoring solutions? Our coverage includes (not limited to) the following: Telecommunications Shipping & Aviation Electronics & Communication Manufacturing Commodities Wholesale & Retail Trade Food & Beverage and Others… 12 Thank You 13 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 markets Government of India has passed Factoring Regulation Act in Dec 2011, to provide better regulation for the factoring business in the country 14 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 mandated This would mean that Banks/ Factor would now have a exclusive and un- Immediate Result: subordinated charge on the purchased receivables. International factoring business grew @ 50% Y-o-Y since the act was passed in India 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 16 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 17
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