Regulation of Bank Finance^399
Further, banks provide collection services only in respect of bills purchased/discounted
or not. But they do not undertake collection of book debts (open account sales) of their
customers.
The existing arrangements are not adequate to cater to all the requirements of seller in
present conditions. Thus, the basic problems faced by sellers is the growing pressure
on their working capital resources on account of their inability to obtain timely payment
for their credit sales. While for sales on open element for the period the credit is normally
expected to be outstanding, often interest is realised for the period the payments are
delayed for the estimated time. Due to growing competition sellers hardly insist on
payment of overdue interest and hence frequently suffer erosion in profit margins and
working capital deficits.
Delayed payment spanning up to 5 month or more is fairly widespread. At times delayed
payment is due to problems experienced by buyers in realising their own dues, thus
indicating inter-dependence of different sectors in ensuring timely payments.
The problem of delays could be mitigated to a great extent if there is an efficient
system of receivables management and collection machinery. At present only large
organisations have separate credit management departments exclusively to attend to
these matters. SSI units can hardly afford a separate staff for the purpose. Quite often,
when required to attend to their recovery personally. Consequently, they are unable to
give due attention to improving their products and enlarging their markets.
While some information on creditworthiness and reliability of buyers in far off places
could be obtained through the banks, the information so available is not adequate for the
supplier to know the operational, financial and market status of the buyer to decide
upon credit terms which may be offered. As a result, they follow cautious approach.
In view of the above, desirability and usefulness of factoring services to suppliers of
goods of services in India was considered by the Reserve Bank of India in January,
1988 when it appointed a study group under the chairmanship of Mr. C. S.
Kalyansundaram, Ex-managing director of State Bank of India, to examine the feasibility
and mechanics of starting factoring organization in India and recommending for their
constitution, organisational set-up, scope of activities and other related matters.
While recognising the need for specialised agencies for handling factoring business, the
group has cautioned that factoring per se would not be a complete solution for delays
and defaults in payments. However, it feels that the professional approach of factor in
credit assessment, debt collection, manage≠ment of sales ledger, etc. should bring about
a noticeable improvement in the payment culture.
The group has estimated the aggregate potential demand for factoring services at about
Rs. 4,000 crores, it is of the view that in the early years, demand for factoring services
would mainly emerge from the SSI sector and those medium and large units, which are