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(^400) Financial Management
experiencing collection delays particularly in industries such as light engineering, textile,
consumer durables, automobile ancillaries and chemicals.
Pricing of Factoring Services
A factor charges fee for the services rendered by it to the client. The fee charged
varies depending on the type of services and creditworthiness, quality of portfolio and
turnover of the clients. Normally the factoring fee in the U.S., U.K. and European
Countries ranges between 1 and 3% of the face amount of the receivables purchased.
If funds are advanced to the seller before the receivables are collected by the factor, an
additional interest charge is levied that is normally tied to, and above the prime rate.
In India, while a similar consideration can hold good, the base level of charges of the
factors would depend upon the various costs to be borne by him, which in turn depend
upon the cost of funds and the cost of management.
The RBI group feels that the price for factoring services may be around 16 per cent
per annum for financing and 2.5 to 3 per cent for other services. It feels that such
pricing should enable the factors to reach a level of business which will generate
reasonable rate of return on their investment. It has emphasized that. the factors will
have to become more efficient than banks in handling the receivables of their clients.
Factoring Organisation in India
In most of the developed countries commercial banks have set-up their subsidiaries to
perform the factoring functions in view of the fact that banks have considerable
experience and have easy access to credit information on both sellers and buyers.
Their large network of branches as also availability of sufficient financial resources
provide them additional advantages. A few banks in India are expected to set-up
subsidiaries to provide factoring services soon.
The RBI study group has suggested that only select promoter institutions, groups of
individuals with good trust record in finance and management should be permitted into
this new field, at least in the early years. This is considered necessary since such
institutions have to set-up good standards and inspire confidence in the public.
The group has further suggested that initially the organisations may be promoted
preferably on zonal basis such as one each for north, east, south and west. As regards
ownership of such institutions, it feels that factoring organisations in the private sector
may not be able to raise sufficient resources at competitive cost for handling business
of the expected magnitude..
The report of the Working Group on Money Market (Vaghul Committee) constituted by
the Reserve Bank of India has also recommended that banks should be encouraged to