Know your Customer (KYC)

KYC is an acronym for Know your Customer, a term used for customer identification process. It involves making reasonable efforts to determine true identity and beneficial ownership of accounts, source of funds, the nature of customers business, reasonableness of operations in the account in relation to the customers business, etc which in turn helps the banks to manage their risks prudently. The objective of the KYC guidelines is to prevent banks being used, intentionally or unintentionally by criminal elements for money laundering. KYC has two components - Identity and Address. While identity remains the same, the address may change and hence the banks are required to periodically update their records. Reserve Bank of India has issued guidelines to banks under Section 35A of the Banking Regulation Act, 1949 and Rule 7 of Prevention of MoneyLaundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. Any contravention thereof or non-compliance shall attract penalties under Banking Regulation Act. Know your customer (KYC) refers to due diligence activities that financial institutions and other regulated companies must perform to ascertain relevant information from their clients for the purpose of doing business with them. The term is also used to refer to the bank regulation which governs these activities. Know Your Customer processes are also employed by companies of all sizes for the purpose of ensuring their proposed agents', consultants' or distributors' anti-bribery compliance. Banks, insurers and export credit agencies are increasingly demanding that customers provide detailed anti-corruption due diligence information, to verify their probity and integrity. globally to financing. Know your customer policies are becoming increasingly important prevent identity theft, financial fraud, money laundering and terrorist

To ensure that the latest details about the customer are available, banks have been advised to periodically update the customer identification data based upon the risk category of the customers. Banks create a customer profile based on details about the customer like social/financial status, nature of business activity, information about his clients business and their location, the purpose and reason for opening the account, the expected origin of the funds to be used within the relationship and details of occupation/employment, sources of wealth or income, expected monthly remittance, expected monthly withdrawals etc. When the transactions in the account are observed not consistent with the profile, bank may ask for any additional details / documents as required. This is just to confirm that the account is not being used for any Money Laundering/Terror It is used means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. Banks have been advised to lay down Customer Identification Procedure to be carried out at different stages i.e. while establishing a banking relationship; carrying out a financial transaction or when the bank has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data KYC is applicable to customers of the bank. For the purpose of KYC following are the Customers of the bank.

a person or entity that maintains an account and/or has a business relationship with the bank; one on whose behalf the account is maintained (i.e. the beneficial owner); beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

Standards
The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. Related procedures also enable banks to know or understand their customers, and their financial dealings better. This helps them manage their risks prudently. Banks usually frame their KYC policies incorporating the following four key elements:

Customer Acceptance Policy; Customer Identification Procedures; Monitoring of Transactions; and Risk management.

For the purposes of a KYC policy, a Customer may be defined as :

a person or entity that maintains an account and/or has a business relationship with the bank; one on whose behalf the account is maintained (i.e. the beneficial owner); beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

Details involved in KYC control

KYC controls typically include below details:

Collection and analysis of basic identity information. Name matching against lists of known parties (such as politically exposed person) Determination of the customer's risk in terms of propensity to commit money laundering or identity theft. Creation of an expectation of a customer's transactional behavior. Monitoring of a customer's transactions against their expected behavior and recorded profile as well as that of the customer's peers.

Document required in KYC

There are two aspects of Customer Identification. One is establishing identity and the other is establishing present residential address. For establishing identity, the bank requires any authentic document carrying photo of the customer such as driving license/ passport/ pan card/ voters' card etc. Though these documents carry the residential address of the customer, it may not be the present address. Therefore, in order to establish the present address of the customer, in addition to passport/ driving license / voters' card / pan card, the bank may ask for utility bills such as Telephone / Electricity bill etc. The detailed list of the documents that the bank can ask is given below. Features Accounts of Individuals - Legal name and any other names used (i) Passport (ii) PAN card (iii) Voter's Identity Card (iv) Driving license (v) Identity card (subject to the bank's satisfaction) (vi) Letter from a recognized public authority or public servant verifying the identity and residence of the customer to the satisfaction of bank (i) Telephone bill (ii) Bank account statement (iii) Letter from any recognized public authority (iv) Electricity bill (v) Ration card (vi) Letter from employer (subject to satisfaction of the bank) (any one document which provides customer information to the satisfaction of the bank will suffice) Documents

- Correct permanent address

Accounts of Companies - Name of the company (i) Certificate of incorporation and Memorandum & Articles of Association - Principal place of (ii) Resolution of the Board of Directors to open an business account and identification of those who have authority to - Mailing address of the operate the account company (iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf - Telephone / Fax (iv) Copy of PAN allotment letter Number (v) Copy of the telephone bill

Accounts of Partnership Firms - Legal name (i) Registration certificate, if registered (ii) Partnership deed - Address (iii) Power of Attorney granted to a partner or an - Names of all partners employee of the firm to transact business on its behalf (iv) Any officially valid document identifying the partners and their addresses and the persons holding the Power of Attorney and their - Telephone numbers of addresses the firm and partners (v) Telephone bill in the name of firm / partners Accounts of Trusts & Foundations - Names of trustees, settlers, beneficiaries and signatories (i) Certificate of registration, if registered (ii) Power of Attorney granted to transact business on its behalf - Names and addresses (iii) Any officially valid document to identify the trustees, settlers, beneficiaries and those holding Power of of the founder, the managers Attorney, founders / managers / directors and their addresses / directors and the (iv) Resolution of the managing body of the foundation / beneficiaries association - Telephone / fax (v) Telephone bill numbers Accounts of Proprietorship Concerns - Proof of the name, * Registration certificate (in the case of a registered address and activity of concern) the concern * Certificate / license issued by the Municipal authorities under Shop & Establishment Act, * Sales and income tax returns * CST / VAT certificate * Certificate / registration document issued by Sales Tax / Service Tax / Professional Tax authorities * Registration / licensing document issued in the name of the proprietary concern by the Central Government or State Government Authority / Department. * IEC (Importer Exporter Code) issued to the proprietary concern by the office of DGFT as an identity document for opening of bank account. * License issued by the Registering authority like Certificate of Practice issued by Institute of Chartered Accountants of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India, Indian Medical Council, Food and Drug Control Authorities, etc. Any two of the above documents would suffice. These documents should be in the name of the proprietary concern.

KYC requirement
A customer belonging to low income group who is not able to produce documents to satisfy the bank about his identity and address, can open bank account with an introduction from another account holder who has been subjected to full KYC procedure provided that the balance in all his accounts taken together is not expected to exceed Rupees Fifty Thousand (Rs. 50,000/-) and the total credit in all the accounts taken together is not expected to exceed Rupees One Lakhs (Rs. 1,00,000/-) in a year. The introducers account with the bank should be at least six months old and should show satisfactory transactions. Photograph of the customer who proposes to open the account and also his address needs to be certified by the introducer, Or any other evidence as to the identity and address of the customer to the satisfaction of the bank. If at any point of time, the balance in all his/her accounts with the bank (taken together) exceeds Rupees Fifty Thousand (Rs. 50,000/-) or total credit in the account exceeds Rupees One Lakhs (Rs. 1, 00,000/-) in a year, no further transactions will be permitted until the full KYC procedure is completed. In order not to inconvenience the customer, the bank will notify the customer when the balance reaches Rupees Forty Thousand (Rs. 40,000/-) or the total credit in a year reaches Rupees Eighty thousand (Rs. 80,000/-) that appropriate documents for conducting the KYC must be submitted otherwise operations in the account will be stopped.

The information collected from the customer for the purpose of opening of account is treated as confidential and details thereof are not divulged for cross selling or any other similar purposes.

Measure in case of no KYC

Where the bank is unable to apply appropriate KYC measures due to nonfurnishing of information and /or non-cooperation by the customer, the bank can consider closing the account or terminating the banking/business relationship after issuing due notice to the customer explaining the reasons for taking such a decision.

Non-performing asset (NPA)

A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of principal has remained past due for a specified period of time. RBI introduced, in 1992-93, the prudential norms for income recognition, asset classification & provisioning IRAC norms in short in respect of the loan portfolio of the UCBs. The objective, inter-alia, was to bring out the true picture of a banks loan portfolio. The fallout of this momentous regulatory measure for the management of the UCBs was to divert its focus to profitability, which till then used to be a low priority area for it. Asset quality assumed greater importance for the UCBs when RBI introduced the Basel norms for Capita Adequacy from year-ended March 31, 2002 in the aftermath of serious financial problems in the sector. Maintenance of high quality credit portfolio continues to be a major challenge for the UCBs, especially with RBI gradually moving towards convergence with more stringent global norms for impaired assets. The quality of a banks loan portfolio can impact its profitability, capital and liquidity. Asset quality problems are at the root of other financial problems for banks, Leading to reduced net interest income and higher provisioning costs. If loan losses Exceed the Bad and Doubtful Debt Reserve, capital strength is reduced. Reduced income means less cash, which can potentially strain liquidity. Market knowledge that the bank is having asset quality problems and associated financial conditions may cause outflow of deposits. Thus, the performance of a bank is inextricably linked with its asset quality. Managing the loan portfolio to minimize bad loans is, therefore, fundamentally important for a financial institution in todays extremely competitive and market driven business environment. This is all the more important for the UCBs, which are at a disadvantage vis--vis the commercial banks in terms of professionalized management, skill levels, technology adoption and effective risk management systems and procedures. Management of NPAs begins with the consciousness of a good portfolio, which warrants a better understanding of risks in lending. The Board has to decide a strategy keeping in view the regulatory norms, the business environment, its market share, the risk profile, the available resources etc. The strategy should be reflected in Board approved policies and procedures to monitor implementation. The essential components of sound NPA management are i) quick identification of NPAs, ii) their containment at a minimum level and iii) ensuring minimum impact of NPAs on the financials. A two-pronged strategy of preventing slippage of standard assets in to NPA category and reducing NPAs through cash recovery, up gradation, compromise, legal means etc., is called for. At the pre-disbursement stage, appraisal techniques of bank need to be sharpened. All technical, economic, commercial, organizational and financial aspects of

the project need to be assessed realistically. Bankers should satisfy themselves that the project is technically feasible with reference to technical knowhow, scale of production etc. The project should be commercially feasible in that all background linkages by way of availability of raw materials at competitive rates and that all forward linkages by way of assured market are available. It should be ensured assumptions on which the project report is based are realistic. Some projects are born sick because of unrealistic planning, inadequate appraisal and faulty implementation. As the initiative to sanction or reject the project proposal lies with the banker, he can exercise his judgment judiciously. The banker should at the pre-sanction stage not only appraise the project but also the promoter his character and his capacity. It is said that it is more prudent to sanction a 'B' class project with an 'A' class entrepreneur than vice-versa. He has to ensure that the borrower complies with all the terms of sanction before disbursement.

Identification
NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in nonperforming loans and often results in massive write-downs. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the 90 days overdue norm for identification of NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be a loan or an advance where;

Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, The account remains out of order for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Classification
Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues: 1. Sub-standard assets: a sub standard asset is one which has been classified as NPA for a period not exceeding 12 months. 2. Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12 months. 3. Loss assets: where loss has been identified by the bank, internal or external auditor or central bank inspectors but the amount has not been written off, wholly or partly. Sub-standard asset is the asset in which bank have to maintain 10% of its reserves. All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. All those assets which cannot be recovered are called as Loss Assets. The Non-Performing Assets (NPAs) of the Indian banking sector have been incessantly rising in the past six months. Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from 2009 to 2012 and assets under reconstruction had trebled during the same period. Indias biggest lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans. According to a recently published Credit Suisse Group AG report, 10 large industrial houses account for 13% of total assets financed by the Banking system, which means that bank lending is getting increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the large manufacturing sector, 3.99% are from the services sector while 1.45% are from the agricultural sector.

Reasons for growing NPAs

1. Economic slowdown - The global economy is still in the throes of an economic crisis that is looming large both in the US and Europe. There is a general slackening of domestic economic activity in India both in manufacturing and the services sectors. A sluggish economy will have a direct impact on the balance sheets and profitability of many firms who have availed of loans from the banking industry. Over a period of time, some of the hard hit firms will be compelled to default on their loans. There is a groundswell of expert opinion in India that NPAs are more an outcome of economic factors rather than any internal systemic failures.

2. High interest rates - It is a known fact that interest rates have been revised upwards, 10 times in the past two years with a view to curb inflation. High interest rate increases the cost of funds to the credit users and has a debilitating effect especially on the repayment capacity of small and medium enterprises. Banks need to maintain their Net Interest Margin and hence pass on any interest rate hike to the borrowers. A high rate of inflation dilutes the quality of assets of the banking sector. Weak supply demand scenario, high borrowing or leveraging and intense competition contribute to loan defaults. 3. New reporting system - Indian banks are to report NPAs from April 2012 in a computer recognized / identified format. It is stated that almost 90% of all banks' loan portfolio is under the computerized system of NPA reporting or system based reporting. The discretion of bank managers in classifying assets according to their local judgment is eliminated. This change in reporting pattern makes identification of NPAs a machine driven objective activity. However, credit risk analysis does have a subjective and judgmental element to it. 4. Aviation sector - The Indian banking system has a total exposure of around Rs. 40,000 crores to the ailing aviation sector. SBI alone has an exposure of 5,000 crores to the aviation industry. It is common knowledge that many airlines are either in the red or marginally profitable. According to an RBI report, nearly threefourths of the top Banks loans to the aviation sector are either impaired or restructured. Kingfisher airlines and Air India have been the significant aviation borrowers whose performance is below par. Unfortunately, signals emanating from the power and telecom sects are not very encouraging and could further accentuate the problem of asset impairment.

Preventing NPAs
1. At the pre-disbursement stage, appraisal techniques of bank need to be sharpened. All technical, economic, commercial, organizational and financial aspects of the project need to be assessed realistically. Bankers should satisfy themselves that the project is technically feasible with reference to technical knowhow, scale of production etc. The project should be commercially feasible in that all background linkages by way of availability of raw materials at competitive rates and that all forward linkages by way of assured market are available. It should be ensured as. A major cause for NPA is fixation of unrealistic repayment schedule. Repayment schedule may be fixed taking into account gestation or moratorium period, harvesting season, income generation, surplus available etc. If the repayment schedule is defective both with reference to quantum of installment and period of recovery, assets have a tendency to become NPA.

2. At the post-disbursement stage, bankers should ensure that the advance does not become an NPA by proper follow-up and supervision to ensure both assets creation and asset utilization. Bankers can do either off-site surveillance or on site inspection to detect whether the unit / project is likely to become NPA. Instead of waiting for the mandatory period before classifying an asset as NPA, the banker should look for early warning signals of NPA. 3. Mandatory period before classifying an asset as NPA, the banker should look for early warning signals of NPA. 4. The following are the sources from which the banker can detect signals, which need quick remedial action: a) Scrutiny of accounts and ledger cards During a scrutiny of these, banker can be on alert if there is persistent regularity in the account, or if there is any default in payment of interest and installment or when there is a downward trend in credit summations and frequent return of cheques or bills, b) Scrutiny of statements If the scrutiny of the statements submitted by the borrower reveal a sharp decline in production and sales, rising level of inventories, diversion of funds, the banker should realize that all is not well with the unit. c) External sources The banker may know the state of the unit through external sources. Recession in the industry, unsatisfactory market reports, unfavorable changes in government policy and complaints from suppliers of raw material, may indicate that the unit is not working as per schedule. d) Computerization of loan monitoring In computerized branches, it is possible to computerize the loan monitoring system so that accounts, which show signs of sickness or weakness can be monitored more closely than other accounts. 5. Personal visit and face-to-face discussion By inspecting the unit the banker is able to see for himself where the problem lies - either production bottlenecks or income leakage or whether it is a case of willful default. During discussion with the borrower, the banker may come to know details relating to breakdown in plant and machinery, labour strike, change in management, death of a key person, reconstitution of the firm, dispute among the partners etc. All these factors have a bearing on the functioning of the unit and on its financial status. 6. Special Mention category of accounts Based on warning signals obtained through both off-site and on-site monitoring, banks may classify accounts with irregularities persisting for more than 30 days under Special Mention or Potential NPA category. This will help the bank to initiate proactive remedial measures for early regularization. The measures include timely release of additional funds to borrowers with temporary liquidity problems and restructuring of accounts of sincere and honest borrowers after considering cases on merit.

7. Ongoing classification Although classification of assets is a yearly exercise banks would do well to have a system of on going classification of assets and quarterly provisioning. This helps in assessing provisioning requirements well in advance. All doubts regarding classification should be settled internally and a system of fixing accountability for failure to comply with the regulatory guidelines should be introduced. 8. Strategy for reducing provision The extent of provision for doubtful asset is with reference to secured and unsecured portion. Cent percent provision needs to be made for the unsecured portion. If banks can ensure that the loan outstanding is fully secured by realizable security, the quantum of provision to be made would be less. It takes one year for a sub standard asset to slip into doubtful category. Therefore, as soon as an account is classified as substandard, the banker must keep strict vigil over the security during the next one year because in the event of the account being classified as doubtful, the lack of security would be too costly for the bank.

Reducing NPAs
1. Cash recovery Banks, instead of organizing a recovery drive based on overdue, must short list those accounts, the recovery of which would provide impetus to the system in reducing the pressure on profitability by reduced provisioning burden. Vigorous efforts need to be made for recovery of critical amount (overdue interest and installment) that can save an account from NPA classification: a) In case of a term loan, the banker gets 90 days after the date of default to take appropriate action and to persuade the borrower to pay interest or installment whichever is due. b) In case of a cash credit account, the banker gets 90 days for ensuring that the irregularity in the account is rectified. c) In case of direct agricultural loans, the account is classified NPA only after two crop seasons (from sowing to harvesting) from the due date in case of short duration loans and one crop season from the due date in case of long duration loans. 2 Up gradation of assets Once accounts become NPA, then bankers should take steps to upgrade them by recovering the entire over dues. Close follow-up will generally ensure success. 3 Compromise settlements Wherever feasible, in case of chronic NPAs, banks can consider entering into compromise settlements with the borrowers.

4 Recovery through legal recourse Since provision amount progressively increases with increase in time, it is necessary to take steps to recover dues either through persuasion or by legal recourse. A strategy of fixing a dead line for recovery may force the bank to either recover or shed the asset off the balance sheet. Banks may file suits promptly against willful defaulters. Banks can take recourse under either a civil suit or the Special Recovery Acts passed by various states or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The bank should vigorously follow up the legal cases.

Conclusion
Management of NPA is need of the hour. To be effective, NPA management has to be an exercise pervading the entire bank from the Board down the last level. Time is of prime essence in NPA management. The course open to the banker is to ensure that an asset does not become NPA. If it does, he should take steps for early recovery failing which the profitability of the bank will be eroded. That can trigger other problems to undermine the banks financial condition.

FACTORING
Factoring is the Sale of Book Debts by a firm (Client) to a financial institution (Factor) on the understanding that the Factor will pay for the Book Debts as and when they are collected or on a guaranteed payment date. Normally, the Factor makes a part payment (usually upto 80%) immediately after the debts is purchased thereby providing immediate liquidity to the Client. Kalyana Sundaram Committee recommended introduction of factoring in 1989. Banking Regulation Act, 1949, was amended in 1991 for Banks setting up factoring services. SBI/Canara Bank have set up their Factoring Subsidiaries: SBI Factors Ltd., (April, 1991) CanBank Factors Ltd., (August, 1991). RBI has permitted Banks to undertake factoring services through subsidiaries.

So, a Factor is, a) A Financial Intermediary

b) That buys invoices of a manufacturer or a trader, at a discount, and c) Takes responsibility for collection of payments. The parties involved in the factoring transaction are:a) Supplier or Seller (Client) b) Buyer or Debtor (Customer) c) Financial Intermediary (Factor)

Services offered by a factor

1. Follow-up and collection of Receivables from Clients.

2. Purchase of Receivables with or without recourse. 3. Help in getting information and credit line on customers (credit protection) 4. Sorting out disputes, if any, due to his relationship with Buyer & Seller.

Process involved in factoring

Client concludes a credit sale with a customer. Client sells the customers account to the Factor and notifies the customer. Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance. Factor maintains the customers account and follows up for payment. Customer remits the amount due to the Factor. Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.

Mechanics of factoring

a. The Client (Seller) sells goods to the buyer and prepares invoice with a notation that debt due on account of this invoice is assigned to and must be paid to the Factor (Financial Intermediary). b. The Client (Seller) submits invoice copy only with Delivery Challan showing receipt of goods by buyer, to the Factor. c. The Factor, after scrutiny of these papers, allows payment (,usually upto 80% of invoice value). The balance is retained as Retention Money (Margin Money). This is also called Factor Reserve. d. The drawing limit is adjusted on a continuous basis after taking into account the collection of Factored Debts. e. Once the invoice is honored by the buyer on due date, the Retention Money credited to the Clients Account. f. Till the payment of bills, the Factor follows up the payment and sends regular statements to the Client.

Charges for factoring services

Factor charges Commission (as a flat percentage of value of Debts purchased) (0.50% to 1.50%) Commission is collected up-front. For making immediate part payment, interest charged. Interest is higher than rate of interest charged on Working Capital Finance by Banks. If interest is charged up-front, it is called discount.

Types of factoring

Recourse Factoring Non-recourse Factoring Maturity Factoring Cross-border Factoring

Recourse factoring
Upton 75% to 85% of the Invoice Receivable is factored. Interest is charged from the date of advance to the date of collection. Factor purchases Receivables on the condition that loss arising on account of non-recovery will be borne by the Client. Credit Risk is with the Client. Factor does not participate in the credit sanction process. In India, factoring is done with recourse.

Non-recourse factoring

Factor purchases Receivables on the condition that the Factor has no recourse to the Client, if the debt turns out to be non-recoverable.

Credit risk is with the Factor. Higher commission is charged. Factor participates in credit sanction process and approves credit limit given by the Client to the Customer.

 In USA/UK, factoring is commonly done without recourse.

Maturity factoring

Factor does not make any advance payment to the Client. Pays on guaranteed payment date or on collection of Receivables. Guaranteed payment date is usually fixed taking into account previous collection experience of the Client. Nominal Commission is charged. No risk to Factor.

Cross
a) Exporter, b) Export Factor, c) Import Factor, and d) Importer.

border

factoring

It is similar to domestic factoring except that there are four parties, viz.,

It is also called two-factor system of factoring. Exporter (Client) enters into factoring arrangement with Export Factor in his country and assigns to him export receivables. Export Factor enters into arrangement with Import Factor and has arrangement for credit evaluation & collection of payment for an agreed fee. Notation is made on the invoice that importer has to make payment to the Import Factor. Import Factor collects payment and remits to Export Factor who passes on the proceeds to the Exporter after adjusting his advance, if any. Where foreign currency is involved, Factor covers exchange risk also.

Statues applicable to factoring

Factoring transactions in India are governed by the following Acts:a. Indian Contract Act b. Sale of Goods Act c. Transfer of Property Act d. Banking Regulation Act. e. Foreign Exchange Regulation Act.

Why factoring has not become popular in India

Banks reluctance to provide factoring services Banks resistance to issue Letter of Disclaimer (Letter of Disclaimer is mandatory as per RBI Guidelines). Problems in recovery. Factoring requires assignment of debt which attracts Stamp Duty. Cost of transaction becomes high.