Credit and financing for MSMEs: Invoice discounting, factoring or trade finance is an extremely important market globally – over $ 3 trillion and is expected to be worth around $ 6 billion to $ 9 trillion over the next four to seven years. , according to several studies. Now where is the Indian market at? This is a paltry size of around $ 6 billion or 0.2% of the country’s gross domestic product (GDP), according to a report by the Standing Committee on Finance tabled in Rajya Sabha in February this year on the bill on factoring. In fact, factoring credit accounts for only 2.6 percent of overall formal credit to Indian micro, small and medium enterprises (MSMEs).
More interestingly, of the Indian debt market as a whole, only 10 percent is currently covered by the formal bill discount system, while the remaining 90 percent is covered through conventional treasury agreements. credit or overdraft with banks. Thus, there is a huge opportunity for the Modi government – to leverage trade finance for exporting and importing MSMEs, and others by allowing easy alternative access to working capital – to help India gain market share. market in the global factoring space.
Perhaps in line with this vision and the overall goal of boosting exports of ‘Make In India’ products, the Gift City-based International Financial Services Centers Authority (IFSCA) recently issued licenses to four bill discount platforms in India, namely KredX. , Vayana Network, M1xchange and RXIL to provide international trade finance to exporters and importers. The latter two are TReDS platforms licensed from the Reserve Bank of India. Established by the government, IFSCA is a unified authority for the development and regulation of financial products, financial services and financial institutions within the International Financial Services Center (IFSC) in India. The young girl center is currently based in Gift city.
“The import and export financing market in India is quite limited, meaning there are very few players. India foresees a significant increase in exports which must be complemented by adequate financing. In the current scenario, exporters and importers do not have adequate access to finance due to a lack of knowledge of available credit options. The goal is to help businesses with working capital issues ensure they are able to bridge the gap between the pre-shipment and post-shipment stages. Also, if you look at factoring as a product, India definitely has a very small market share while China leads the rankings in terms of factoring volumes, ”said Anurag Jain, co-founder and Managing Director of KredX at Financial Express Online.
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Compared to the 2.6 percent share of factoring credit in total formal MSME credit in India, the share in China is 11.2 percent. And unlike the 0.2 percent share of India’s factoring market in the country’s GDP, Brazil’s factoring market has a 4.1 percent share in its GDP, while China has a share of 3.2 percent. On the other hand, Europe continues to dominate the factoring market globally with two-thirds (68%) of factoring worldwide, notes the standing committee report.
“Three big changes will happen as a result of this initiative. First, liquidity will improve dramatically for exporters and importers of foreign currency. Second, they’re going to have access to a lot more institutions (lenders), and therefore a lot more rage and competition will be there. And third, it will allow many more MSMEs to get into exporting and importing without having to worry too much about spending a lot of time securing funding, ”said Ram Iyer, Founder and CEO of Vayana Network at Financial Express Online.
These entities will test the new service as part of the regulatory sandbox at IFSC and are expected to officially roll out by the end of the first quarter or in the second quarter of the following calendar year. The idea is to allow businesses to access a platform where multiple lenders are interested in invoice financing. This should lead to competition among lenders and, since the tendering mechanism generally works in strong competition, it would be possible to reduce the overall cost of finance and benefit both exporters and imports.
“Large exporters can go to five or six different banks to get the best quotes. Small and medium-sized exporters do not have this option because their capacity is limited. They just go to their own banks. Although they negotiate, it is only up to a certain limit because they do not have access to other banks at that time. With the new platform, they don’t have to wait for the money to come from abroad. They are assured that they will receive the payment and that they can finance as soon as possible, which may be without recourse, ”Ketan Gaikwad, Managing Director and CEO of RXIL told Financial Express Online.
For example, about a year ago, large domestic companies were getting funding at 7%, which is now around 4%, as more banks join TReDS, resulting in more competition, Gaikwad added.
“This (IFSCA licenses) will definitely help exporters as it also depends from company to company. There are a number of exporters who don’t prefer to fund their invoices through any means because they just don’t want to share their payment details and other financial data. However, I would expect a large number of MSME exporters and importers, who are struggling to maintain adequate working capital and are working on long term credit of six months and even a an, benefit from this decision, ”Ashwani Kumar, who heads manufacturing toolmaking company Victor Forgings and is also the northern region president of the Federation of Indian Export Organizations (FIEO) told Financial Express Online.
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While the platforms can start with the banks on the lending side, but over a period of time, if there are global institutional investors engaged with the platforms and are able to provide borrowers with loans or credits to the borrowers. Originally in a package that is rated and insured, the benefit would be massive for MSMEs.
“This basically means that the more different types of investors are able to get into the game, it will make it more competitive and lower costs. There is a lot of liquidity available in India and even outside India, which are flocking to stocks, bonds and other markets. Recently, some Indian bonds have been included in foreign markets. This implies that these bonds will now be eligible to be bought by global institutional investors, which will lead to an increase in the As demand increases, interest rates tend to fall. This lower cost of credit will benefit Indian customers, businesses, importers and exporters, ”Jain added.
Once launched, manufacturing MSMEs are expected to be the biggest beneficiary as relatively fewer large companies engage in commercial invoicing as the working capital challenges are not acute for them. Benefiting MSMEs are also growing in importance as they account for nearly 50 percent of India’s annual exports. “Payment challenges are present in all kinds of businesses. Customers in China only make full payment in advance for our exports. In other countries, customers do not pay the entire advance. In most cases, payments are made within 30-90 days. At least through factoring, you get majority payout, ”said Raj Kumar Malhotra, managing director of Asian Handicrafts at Financial Express Online.
Authorized entities would create subsidiaries for international trade finance companies. “By regulations, you must create an entity. Although it is a subsidiary, but you will need a separate legal entity for it, ”added Iyer.
Importantly, in July of this year, Parliament passed the Factoring Regulation (Amendment) Bill 2021 to assist MSMEs with better avenues of access to credit, in particular through TReDS. The changes to the bill were intended to expand the participation of entities such as non-bank financial corporations (NBFCs) in the factoring market. Finance Minister Nirmala Sitharaman in Rajya Sabha when the bill passed on July 29 reportedly said the amendment would get 9,000 NBFCs to provide factoring benefits to MSMEs compared to seven previously.