What happens when three Finance Majors come up with a joint venture right at the country's finance capital? Bureaucracy, Industry and Media congregated here to find out and gather hope in the time of recession. Indeed, all eyes were on Global Trade Finance Limited (GTF), the JV between the Export and Import Bank of India, Germany-based WestDeutsche Landesbank Girozentrate (West LB) and the International Finance Corporation, which began its operations in India.

Doing the inaugural honours was Union Minister of State for Commerce and Industry Rajiv Pratap Rudy who pointed out that  GTF's objective is to promote market-driven export-financing solutions for Small and Medium-sized Indian Exporters (SMEs) operating in an increasingly competitive world trade environment. "This sector contributes more than half of the entire Indian exports in sectors like gems and jewellery, engineering etc. The new JV would sure boost the small-scale industry."

Veena Mankar, Chairperson, Global Trade Finance, said the joint venture was born as a result of the need each of the three partners had felt in recent months.

• The Exim Bank, with its focus on exporters, wanted more products which could be offered to its customers.
• West LB, which has a representative office in India, was finding it tough to get business as the size of the receivables was small, making the associated processing cost high.
• IFC, Washington (an affiliate of the World Bank) was looking out for means to encourage factoring and forfaiting services in developing countries.

According to the pact, Global Trade Finance (GTF) would generate business, though, in compliance with the RBI rules the receivables it buys would be taken in the books of West LB, London, with the processing itself carried out by GTF. The receivables will be covered by a guarantee from West LB, London.

And then, for the first time, GTF offers Forfaiting and Export Factoring to Indian exporters under one roof in India and has received the necessary approvals from the Reserve Bank of India.

The company has an equity capital of Rs 45 crore, of which West LB has a 40-per cent stake in the venture, while Exim Bank  35 per cent and IFC hold 25 per cent stake respectively. In addition, the company has foreign currency lines of credit from both West LB and IFC, as well as a rupee line of credit from Exim Bank.

It may be mentioned that factoring is for short-term receivables (under 90 days) and is more related to receivables against commodity sales. International or Export factoring eases much of the credit and collection burden created by international sales. By outsourcing the credit function, exporters can convert the high fixed cost of operating an international credit department into a variable expense. Commissions paid to the Factor are based on sales volume, so costs fluctuate with actual sales, lowering operating costs during slow sales periods. In addition to relieving exporters of the time-consuming administrative burden of approving credit and collecting export sales, export factoring lets exporters safely offer their foreign customers competitive open account terms.

Forfaiting can be for receivables against which payments are due over a longer term, over 90 days and even up to 5 years. Export Factoring provides credit assessment, credit protection, financing, and collection services to exporters for regular sales on open account terms. As the demand for open account trading expands globally, the need has arisen for Indian exporters to offer similar terms to importers in order to remain competitive. GTF will help fill this need for the industry. Alternatively, forfaiting enables exporters to offer longer-term financing to importers of capital goods from India. Both products, being complementary and available at a "one stop shop", will therefore provide greater client servicing and support through tailor-made financing packages

The difference in the risk profiles of the receivables is the fundamental difference between factoring and forfaiting, which has implications for the cost of services. Both factoring and forfaiting are like bill discounting, but bill discounting is more domestic-related and usually falls within the working capital limit set by the bank for the customer.  

For more details, mail kartik@indiamarkets.com

Global Trade Finance and indiamarkets make exports hassle-free for SMEs