Austria: Thomas Steiner Brazil: João Costa Pereira Chile: Gustavo SalischikerChina: Frank Wu France: Philippe PougeardHong Kong: Rajesh MehraIndia: Asim HussainMalaysia: Chew Wee KiangNetherlands: Adriaan BellaartNigeria: Onyebuchi MemehPoland: Paweł PerekitkoPortugal: Rui EstevesRomania: Anca Dogaru Russia: Natalia SavinaSpain: Carlos OlivaresSweden: Niklas CallerstromTaiwan: Bryan ChenTurkey: Nida BektaşUAE: Faraz HaiderAbhijit PrasadUK: Anil WaliaUSA: Stuart Roberts

Head of Global Transaction Banking Austria, Deutsche Bank AGCEO, Brasilfactors S.ADirector CTS Head Chile, Citi Transaction ServicesGreater China Head of Trade Finance & Cash Management for Corporates, Global Transaction Banking, DBDirector, Structured and International Operations, CGA - Compagnie Générale d’AffacturageProduct Head - Local Corporates, CTA & Trade, East, Transaction Banking, Standard Chartered, BankManaging Director, Bibby Financial ServicesHead, Local Product Management , Transactional Banking, Standard Chartered BankSenior Origination and Structuring, Supply Chain Finance, INGDirector, Transaction Banking , Standard Chartered BankHead of Strategic Clients Team, ING Commercial Finance Polska S.A.General Manager , Eurofactor PortugalDirector, Factoring, BRD-Groupe Societe Generale RomaniaSenior Origination and Structuring, Supply Chain Finance, ING Commercial Banking RussiaDirector, BBVA Factoring and Confirming SpainGlobal Transaction Services, SEB Merchant BankingHead of Global Transaction Banking Taiwan, Deutsche BankGeneral Manager, Yapı Kredi Faktoring A.S Head of Trade for the Middle East and Pakistan, Citi, DubaiSupply Chain Finance Product Manager for Europe, Middle EAST and Africa, Citi, LondonRBS Head of Trade and Supply Chain Finance Advisory, UK and EMEAHead of Supply Chain Finance, Wells Fargo Capital Finance

world supply chain financeYEARBOOK 2012/2013

An exclusive country by country review of global supply chain finance markets:

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Order your copy now www.bcrpub.co.uk

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INDIA

Asim HussainManaging DirectorBibby Financial Services, India

INTRODUCTION

Rapid globalization has signifi cantly increased the importance of supply chain management (SCM). Increasing competition also means that corporates need to retain their valuable supply chain partners, particularly on the dealer/distributor (buyer) side. Countries such as India, with relatively low cost of manufacturing and services capability, often act as hubs for outsourcing and managing the suppliers that become vital to sustaining competitive edge. An integral part of SCM is supply chain fi nance (SCF) solutions which combine trade fi nancing and usually technology solutions that unite buyers, suppliers and trade fi nancing sources electronically.

Indian corporates are putting greater focus on SCF as an important tool in order to provide liquidity to their smaller supply chain partners, reduce costs and extract loyalty from the supply chain. At the same time, there is increasing demand from the SME suppliers and buyers for better terms. A recent study conducted by CRISIL (a reputed credit rating agency in India) states that timely payment by large corporates to SMEs could enhance profi ts of the SMEs by 15 per cent or more.

INDUSTRY ENVIRONMENT

Th e Indian economy saw moderation in economic activity during fi scal year 2012 following domestic macroeconomic conditions of high interest rates, high infl ation and slowdown in investments. Th e industrial sector grew by 3.3 per cent compared to seven per cent in fi scal year 2011. India’s GDP grew by 6.9 per cent in the fi scal year 2012 compared to a growth of 8.1 per cent in the previous year. Th e GDP estimates for 2012-13 are between 6 and 6.5 per cent.

During the period April 2011-January 2012, India’s exports grew by 23.5 per cent; however, the growth decelerated to 6.1 per cent during the early part of 2012, due to the Eurozone crisis. Gradually, the share of Asia and ASEAN markets in total trade has increased to over 57 per cent, while that of America and Europe

ASIA

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INDIA

has decreased to below 30 per cent. Th is has helped India weather the global crisis emanating from Europe and America.

India’s central bank, Th e Reserve Bank of India (RBI) calibrated its policy stance in line with macroeconomic conditions. Th e RBI, which had increased repo rates 13 times by 175 basis points between 2010 and 2011, fi nally cut repo rates by 50 bps and cash reserve ratio (CRR) by 125 bps in order to boost growth.

For Indian corporates, open-account methods of payments continue to be the dominant mechanism with 75-80 per cent of payments to buyers and suppliers falling in this category. Th e rest is made up using letters of credit, bank guarantees and documentary credits.

Th is is also corroborated by the ICC global survey 2012. As Indian companies grow with the economy; they need to sustain growth by ensuring availability of liquidity and bank credit to their supply chain partners.

MARKET PERFORMANCE AND SUPPLY

According to a recent study by CRISIL global analytics, delayed payment of receivables remains as one of the three main issues for SMEs along with availability of bank fi nance and interest rates. Th e study says that SMEs with large corporate customers carry receivables at over 80 days of sales. However, over 35 per cent of the SMEs researched had receivables in excess of 90 days. Th e past four to six months has seen further stretching of payment terms to anywhere between 90 and 120 days.

0

100

200

300

400

500

Imports

Exports

2012201120102009

Source: Indiabudgetnic.in

YY2009-2012: Exports-Imports Growth (USD billion)

0

2

4

6

8

10

20122011201020092008

YY2008-2012: Gross Domestic Product Growth Rates (%)

Source: RBI

9.3

6.7

8.4 8.4

6.9

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Th e report further says that there is scope for banks and non-bank fi nancial companies to increase working capital lending to SMEs by approximately USD 10 Billion. Clearly, the report indicates huge untapped supply chain fi nance potential, as a high proportion of SMEs are suppliers/buyers of large corporates.

Th e largest Industrial groups in India (TATAs, Birla group, Reliance, Bajaj, and L&T etc.) now have their own non-bank subsidiaries that focus on providing fi nance to the supply chain partners of these corporate groups.

Some of the more popular SCF products and their availability are as follows:

a) Dealer/Distributor Finance (DFP)

Traditionally, a DFP is without recourse, though the backing of a strong corporate (a stop-supply arrangement) helps lenders recover dues. However, since the credit crisis, banks have become cautious and tend to sanction such deals with suitable mitigation, collateral or guarantees. Increasingly, this product is available to very large corporates. Several banks in the past 12-18 months have reduced their unsecured DFP books, with ICICI Bank, HDFC, Standard Chartered and Axis Bank being the largest players.

b) Vendor Finance

Increasingly, SCF programmes in India focus on suppliers rather than buyers. Being lower-risk and easier

to manage operationally, vendor fi nance is the preferred SCF product in India. Most large Indian and multi-national corporation banks have developed technology platforms which are integrated with the ERP systems of the corporates availing SCF. Vendor programmes are usually based on approved payables by a reputed corporate buyer, preferably via an electronic mechanism.

c) Domestic Factoring (receivables and reverse factoring)

Since the credit crisis of 2008, domestic factoring slowed down considerably. Th e largest player M/s SBI Global (post SBI Factor’s merger with M/s Global Trust Factors) is in a consolidation phase, while HSBC has reduced its SME factoring book considerably. Factoring volumes have remained stagnant. As per FCI data, India clocked up a factoring volume of Euro 2.8 billion for 2011, a growth of 1.8 per cent over the previous year. Relatively newer entrants such as Bibby Financial Services, IFCI Factors and India Factors are emerging as signifi cant players, providing SCF to the smaller corporates. Passage of the Regulation of the Factors Bill, 2011, is expected to give a much needed boost to factoring services in India.

d) International Factoring (Export and Import factoring)

Th e continued lack of availability of credit insurance to lenders as per IRDA (Insurance Regulatory Authority of India) guidelines has signifi cantly reduced the

0

1

2

3

4

5

6

7

8

2011201020092008200720062005

Source: Factors Cahin International

YY2005-2011: Factoring Turnover (USD million)

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availability of international factoring options in India. Th e Eurozone crisis and fl uctuating currency have further made this a risky option for factors. Much of international trade continues to take up the letter-of-credit option. As per FCI data, of the Euro 2.8 billion factoring volume recorded in 2011, only Euro 150 million was contributed to international factoring. Even on a general basis, export credit growth has slowed down to 8.4 per cent in Fiscal Year 2012 over 22.2 per cent in the previous year. Export credit, as a percentage of net bank credit, accounts for only 4.2 per cent (2011) down from 5.5 per cent in 2008. While the RBI has taken several measures to encourage export fi nancing, there remains a gap in the availability of, and risk appetite for, suitable products.

FUTURE TRENDS

Indian corporates growing in size and expanding geographically seek SCF as part of the credit facilities available from their banks. For banks too it is a win-win situation as they seek to lend to SMEs with linkages to corporates, thereby reducing risk.

Investment in technology platforms to deliver SCF in a cost-eff ective manner is a visible trend across the banks. India’s largest bank, State Bank of India, has introduced a web-based platform for fi nancing its supply chain partners. Th is technology-based platform can be well adapted to the Corporate Enterprise Resource Planning software, eliminating paperwork. Th e online platform will help corporate customers in uploading the invoice details raised by suppliers and invoice details made by dealers, and will hasten the whole process of automated settlement and transfer of funds. Similarly, the Small Industries Development Bank of India (SIDBI) has tied up with the National Stock Exchange (NSE) to launch an E-discounting platform called NTREES. SMEs will have the option to sell their receivables to suitable fi nanciers on this platform.

Th e recently passed Factors Regulation Bill is likely to give a much needed boost to factoring services in India. Th e bill aims to provide clarity and transparency with respect to the assignment of receivables and thus de-risk the business. It is expected that the sector will witness entry of new large players, which would expand the market.

Th e Indian government has approved 51 per cent FDI in multi-brand retail and raised the cap on FDI in single-brand retail from 51 per cent to 100 per cent with some riders, including mandatory sourcing of 30 per cent of inputs from local, small and medium-sized companies. FDI in retail will boost investment in infrastructure from the retail players, and third-party supply chain companies as well as the Government at the back of a sophisticated front end that international players are likely to bring. Surely, factoring will witness signifi cant growth in this sector. Additionally, proposed implementation of Goods and Services Tax (GST) in 2013 is further likely to increase trade activities and make transactions easier and transparent, which will support trade fi nancing.

Th e Indian Parliament has also passed the Public Procurement Bill 2012, which mandates an annual target of 20 per cent procurement for the central government departments and public sector undertakings from SMEs. Th e move is an assured growth opportunity for the small business community. Th at substantial opportunities will arise amongst SMEs is a foregone conclusion.

Th e Foreign Trade Policy 2009-14 sets out a goal of doubling India’s exports of goods and services by 2014, with the long term objective of doubling India’s share in global trade by the end of 2020 through appropriate policy support. Th e government will need to promote export credit if this target is to be achieved. Global SCF should be a direct benefi ciary.

Clearly, there are huge untapped and emerging opportunities in the receivables fi nance arena in the Indian market, so banks and factoring companies who strategically plan, invest and position themselves well, will benefi t.