Both developed countries and developing countries prefer factoring as a sophisticated payment method for short term financing purposes. This is a unique method of financing trade without collateral, and is very much suitable for SMEs. Currently, some financial institutions (FIs) in Bangladesh are financing local trade through discounting Invoices but without guarantee of collection of payments. This financing also does not need mortgage of immovable properties. The rate of interest is very high than that in regular loan and against collaterals.
Recently, Bangladesh Bank has drafted a new policy "Export under open account and repatriation of export proceeds by factoring arrangement on non-recourse basis" to allow open transaction for export uasance term and with arrangement of Factoring under certain strict conditions. Usance means period of credit or term. Usance bill is a bill of exchange which allows the drawee to have a period of credit or term. The draft has been circulated for opinion of experts and stakeholders.
There was a discussion for long time to introduce Factoring in Bangladesh. Bangladesh international trade mostly transacts through letter of credit although global market is reducing the use of Lc and using open account transactions. Bangladesh Bank prepared a concept paper through an expert team headed by Professor Prashanta Banarjee of BIBM in 2016. The export policy 2015-18 incorporated a clause expressing interest of promoting Factoring for financing exports although Factoring is used in import and export as well as local transactions.
Open Account transaction occurs on the basis of contract. An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is generally few months. Open Account is the least secure method of payment for the exporters. But it is the most attractive method for the importers. It is equally attractive to both importers and exporters as it is less expensive for transaction. The open account is on the basis of trust between buyer and seller. Factoring is one of the methods to secure payment of Open Account transaction. Unfortunately, Open Account is not allowed for export trade in Bangladesh as this is restricted with many rules and regulations.
Export factoring is a complete financial package that combines export working capital financing, credit protection, foreign accounts receivable bookkeeping, and collection services. A factoring house or factor is a bank or a specialised financial firm that performs financing through the purchase of invoices or accounts receivable.
The factors usually make partial advance payment to the exporter to extend 95 per cent of Invoice value. Usually, Factors provide services of (a) payment guarantee of invoices, (b) collection of export proceeds and (c) management of receivables. Export factoring is offered under an agreement between the factor and exporter, in which the factor purchases the exporter's short-term foreign accounts receivable for cash at a discount from the face value, normally without recourse. The factor also assumes the risk on the ability of the foreign buyer to pay, and handles collections on the receivables. In case of nonpayment by the buyer, the risk is assumed by the factor which cannot request the payment back to the seller under 'without recourse methods'. Factoring foreign accounts receivables is a viable alternative to export credit.
According to the draft BB rule, the authorised dealer (AD) branches of Bank of exporter must be satisfied as to the surety of payment of export proceeds (section- a). AD should be satisfied that export price is competitive and loaded with usance interest and commensurate with prevailing interest rate in the concerned currency (sec- b). On the other hand there will be cap on the interest rate of factoring service to maximum of 6 per cent for all expenses of interest, commitment/guarantee, charges, fees etc (sec- c). In the globalised market central bank wants to make sure that export is at competitive price and cap the interest rate. The method of determining the competitive price has not been elaborated.
Section-d of the draft made mandatory to make an arrangement / relation with Factors operating under licence of the central bank or other authority, and AD as the counter party may join the global professional bodies. It means that AD banks will have partnership /agency agreement with Factoring Companies having licence of Bangladesh Bank. The AD branches will be either local agent /partner of Factoring Companies and also take membership of global professional bodies.
International factoring business involves networks of professional bodies, which are similar to correspondents in the banking industry. There are three sources for global networks-Factors Chain International (FCI), International Factors Group (IFG) and International Factoring Association (IFA). This indicates that Factors may be local or overseas and shall register with Bangladesh Bank or any other regulating authority and the factor will have partnership with AD.
In factoring, presentation of documents is a major issue. According to the draft, AD may send documents to any organisation other than the bank to be fully satisfied with the arrangement of repatriation of payment (sec- e). Moreover, as an extra comfort, AD may at discretion, obtain personal guarantee from firm / company to ensure realisation of export proceeds under this arrangement. This seems that central bank encourages obtaining personal guarantee from firm / company that are Factors. It may also be presumed that Factor or exporting firm / company will give guarantee.
The major challenge for factors is the proposed interest rate of maximum 6 per cent, and it also proposes for personal guarantee from someone, but the draft has not given any clear direction in this regard. The draft has given responsibility of Factoring at the 'discretion and full satisfaction' of the AD. Experience says AD will ask for mortgage of properties from the exporter for Factoring service.
Global Factoring also work with dual Factoring involving two Factors in exporting and imploring countries each. The Factors are usually member of internationals association of Factoring and they abide by rule of transactions and guarantee of payment. The draft has no direction regarding single or dual factoring etc.
The rule should clarify the relationship between AD branch and Factors. AD shall be the banker of the exporter and at the same time cannot be agent / partner of Factors, rather remain a counter party in Factoring agreement. The interest should be negotiable and not fixed at highest 6 per cent. Any excessive paper work and guarantee will increase the cost of Factoring services. Such increase of cost will defeat the concept of low cost and mortgage-free finance of SMEs for local and overseas transactions.
BB drafted Factoring policy is only meant to ensure repatriation of export proceeds. The focus should be financing local and international trade financing without collateral and reform traditional transaction based on LC and other formalities.
Many countries have law for Factoring and Bangladesh may consider passing a law on the basis of international convention and practices of Factoring.
M S Siddiqui is a Legal Economist. email@example.com
© 2017 - All Rights with The Financial Express