b) Mechanism of International Factoring:

When the seller and the buyer are in different countries the service is called international factoring. International factoring works on a correspondent system where export factors sub-contract part of their services to a factor in the importer’s country. Here, the communication channels are between the four i.e. (a) export supplier, (b) export factor, (c) import factor & (d) customer importer as against the three parties in domestic factoring. The import factor provides a link between export factor and the importer and serves to solve the international barriers like language problem, legal formalities, etc. Besides, he underwrites customers trade credit risk, collects receivables and transfers funds to the exporter-factor in the currency of the invoice, the communication flow between these parties in international or cross border factoring is given below.

The flow of documents and information as shown in above figures takes the following shape:

a)          The exporter in Nation A informs the export factor to export goods to a particular import-client in Nation B.

b)          The export factor in Nation A writes to import factor in Nation B and enquires of the creditworthiness, reputation, etc. of the importer.

c)          On getting satisfactory information from the import factor (Nation B) the exporter delivers goods and raises the invoice a copy of which is given to export factor.

d)          The export factor prepares the invoice and a further copy of the invoice is sent to import factor.

e)          The import factor collects the payment from the importer and pays the export factor in the currency of invoice.

International factors provide a non-recourse factoring service. Clients have cent percent protection against bad debt loss in credit-approved sales. The factors tale requisite assistance and avail facilities provided in the exporting nation for promoting exports. Factor handles exporters’ credit management and collections, multi-currency sales accounting and provides regular management reports to him. Factor services cover exporters’ overseas sales on credit terms. In fact, factor becomes the sole debtor to exporter once documentation is complete and goods have been shipped. After shipment, the exporter sends copies of the invoices to the factor that assumes responsibility for the collection of amounts due and accepts the credit risk in approved accounts. Fee for factoring services range between 0.5 % to 2.5 % depending upon the nature of the ledger, the number of invoices and their value. Banks have moved in and now render factoring services and serve as correspondents.  .

Factoring Example:

The ABC Company delivers $1,000 worth of product to a customer, sends out an invoice with payment due in 30 days, and then waits for the customer to pay. Thirty days later, the customer (hopefully) remits payment, whereupon ABC finally has the money it actually earned one month earlier.

Shortly thereafter, ABC decides to use the services of a factor. The factoring terms they agree upon are a 70% advance, and a 5% fee, or discount. As before, ABC delivers $1,000 worth of product to the customer, and produces an invoice with 30-day terms, it then sends the invoice to the customer, with a notation that payment is to be rendered to the factor. A copy of this invoice is also sent to the factoring company.

Upon receiving the invoice, the factor verifies with ABC’s customer that the product was received and accepted, and that payment will be sent to the factor when the invoice comes due. Once this is done the factor advances 70% or $700 of the invoice amount to ABC, Then warts for ABC’s customer to pay it the full $1,000.

One month later, the customer remits the $1,000 to the factoring company. After receiving this money, the factor retains the agreed-upon 5% ($50 in this example) for its fee, and releases the remaining 25% (the reserve) back to ABC. The process is now complete.

When all is said and done, ABC has received 95% ($950) o1 the $1,000 invoice: $700 from the advance and $250 from the reserve, with the remaining 5% ($50) being retained by the factor.

MAIN TERMS AND CONDITIONS OF FACTORING:

Factoring contract is like any other sale-purchase agreement regulated under the law of contract. The main terms and conditions of factoring which are included in the agreement to be entered into between the supplier and factor are precisely listed below:

1. Assignment of debt in favor of factor.
   1. Selling limits and the conditions with which the factor will have no recourse to the supplier on non- payment from the customer and in what circumstances the factor will turn to recourse to the supplier.
   2. Selling out details of the payment to the factor for his services known as service charge or commission charge, which is usually a percentage on turnover.
   3. Selling out details of the interest to be allowed to the factor on the accounts where credit has been allowed/ to be allowed to the supplier. The rate of interest is to vary depending upon the money market conditions and is commonly fixed above the base rate so as to give a better margin to the factor.
   4. Agreement should set the limit of any overdraft by the supplier and the rate of interest to be charged by the factor on such overdrafts.
   5. The agreement should specify that the amount to be paid by the factor to the supplier should be net of the service charge.
   6. The percentage of the amount of the invoice value to be received from the factor by the supplier is specified in the agreement. Usually, about 80% of the invoice value of the amount is provided by the factor to the supplier.
   7. Specific schedule be provided in the agreement setting out special terms for the factor to handle accounts of different customers.

FACTORING COSTS:

The costing of factoring is a major aspect that has to be dealt with carefully. Charges of factoring should be kept as minimum as possible so that it becomes an attractive proposition for the industrial enterprises. Many experts classify the factoring cost into two categories, i.e.,

I.   Commission: this may be charged for performing the collection function and for purchasing the firm’s receivables without recourse to the drawer for future credit losses. II.   Services & interest charges: the service charges are charged for providing instant credit, without waiting for realization of receivables.

The major determinants of factoring charges can be listed as follows:

i)   Type of industry.

ii)  Volume of sales.

iii) Average annual safes.

iv) Credit rating of the customer.

v)       Quality of the accounts receivables.

BENEFITS OF FACTORING:

Factoring of the commercial debt is a fast growing significant service to the world business community. It is getting popularity at an impressive rate in both the domestic and international trade. Factoring actually goes a long way to help the borrowers to improve their financial discipline and to serve as a catalyst for expansion and growth of industrial and business units. All the advantages of factoring cannot be shown in a discussion of this kind, because different types of companies require different applications of factoring.

Advantages of domestic factoring:

The domestic factoring dominates the market share in the total factoring business. Benefits derived from domestic factoring have been described here tinder two contexts namely direct benefits and indirect benefits.

Direct benefits

The direct benefits that factoring brings are best illustrated as shown in the income statement and balance sheet of a client.

Effects on Income Statement:

The real benefits get reflected in the income statement. The saving, which accrues from the services, would enhance the profitability of the firm. The benefits of factoring reflected in income statement can be analyzed in the following ways:

Reduction in administration expenses:

The factor performs some basic functions like administration of client’s sales ledger, credit control, collection of dues, etc. He can, thus, have the benefit of reduced overheads, on this count by way of saving in salary expenses, stationery, postage, telephone, and overheads of various departments.

Reduction in bad debts loss:

Under ‘without recourse factoring’, the client’s credit losses are ed to the factor. The factor makes credit assessment expeditiously. In addition to certain coverage of credit loss, the client is, thus, relieved of expenses of maintaining credit department and of collecting credit information.

Getting benefits of lower price, trade discount, and cash discount, etc:

Steady and reliable cash flow enables the client to honor its obligation without any delay. Factoring helps the client to get some facilities like taking cash discount for prompt payment and trade discounts for bulk purchases, ordering for materials at the right time and at the right place, executing production schedule as planned, taking longer credit period from suppliers, and having better market standing These result in reduction of cost of material of the client’s firm.

Reducing the working capital needs:

Factoring is best applied to the normal trade and production cycle i.e. purchases, stocks, manufacturing, and sales It helps the client to avoid disruption in the production schedule due to bottlenecks in the smooth flow of critical raw materials, etc This reduces he operating cycle period, resulting in the reduction of working capital needs. This saves the interest on working capital.

 lndirect benefit:

In addition to these direct benefits as stated above, factoring also offers many incidental and indirect benefits. The following are the incidental and indirect benefits flowing from factoring.

Management time and energy saved:

By shifting the function of credit control, sales ledger administration, and debt collection problem, the client saves time and energy. They can concentrate more on managerial functions like planning, organizing, controlling, etc. Better planning improves quality and marketability of the products, morale of the employees and excellence in the performance.

Improved efficiency:

Factoring is designed to place small and medium sized units on the same level of efficiency in the areas of credit control and sales ledger administration like most sophisticated large companies. Factoring does this at a reasonable cost. Moreover, the factor on account of his experience and specialization, advises the firm on critical areas like product design, production method, product mix, marketing mix, machinery replacement, technology, etc. These advices go a long way in improving efficiency.

Higher credit standing:

Dandekar (1991, p. 128) has mentioned four reasons why a client’s credit standing improves: (a) in the case of ‘without recourse factoring’, the factor’s assumption of credit risk replaces the credit responsibility of the client’s customers of varying credit strength; (b) ‘Without recourse factoring’ also enables the client to minimize bad debts reserve; (c) with cash flow accelerated by factoring, the client is able to meet the liabilities promptly as and when these fall due; and (d) the factor’s acceptance of a client’s receivables for factoring itself speaks well of the quality of his receivables. This can also increase the client’s credit rating because of the client’s higher credit standing with the factor.

Increased turnover:

Much important is the opportunity of incremental sales, which can be achieved because of an increased working capital. Moreover, since the factor has access to almost unlimited credit information, the factor may be willing to accept new or higher credit risks over that which the client individually may not be willing to accept.

Relationship between the customer and the client:

The relationship could be jeopardized in any possible way. Factoring can enhance this relationship. Since the factor is responsible for accumulating credit data and for collections, the clients relationship with their customers remains excellent even if the customers are unable to make payments when due.

Expansion of the business:

The factor enables a company to get on with its profitable and predictable expansion without the inherent worries of ‘where does the next cash come from?’ and how do we collect our money to get on with the jobs?

Advantages of international factoring:

In international factoring, there are always two parties other than the exporter and importer namely the export factor and the import factor. The role of the factoring organization is likely to alternate between as export factor and import factor, depending on the nature of transactions. The distinct advantages over other methods of finance can be summarized as follows:

Flexible form of finance and predictability of cash flows:

It provides an immediate finance up to a certain percentage of the eligible export receivables. This prepayment facility is available without letters of credit — simply on the strength of the invoices representing shipment of goods. Moreover, bad debt protection up to full extent on all approved sales to identified debtors ensures reliable predictability of cash flows

Healthier customer portfolio:

The factor checks all the prospective debtors in importing countries. They do it through limit own database or by taking assistance from their counterparts in importing countries known as import factors or established credit rating agencies. Hence, the exporter can be sure that he has healthier customer’s portfolio.

Efficient communication and prompt collection:

The factors maintain efficient and fast communication with import factors as well as importers. They do this through letters, telex, fax, e-mail and telephone or in person in the buyer s language and in line with the national business practices. The prompt payment is, thus, handled in a diplomatic and efficient manner.

Maintenance of multi-currency sales ledger:

Factor provides a multi-currency sales ledgering system. It enables local exporters to keep track of their sales in various currencies.

Hedge against foreign exchange fluctuations:

Factor can arrange for appropriate forward exchange covers to protect the exporters against currency fluctuations.

BILLS DISCOUNTING AND FACTORING:

Bills discounting/ invoice discounting is a means whereby firms with short-term cash problem can improve liquidity by obtaining cash against bills / invoices commonly up to 80 per cent of value of the accounts receivable, Here, the accounts receivable are pledged to the financing institutions, the customers are not notified of this transfer, and the business concerns collect the amount from customers and turn over to the lender all amounts which they receive on the pledged accounts receivable. To the business concern where requirements are exclusively of financial nature and who is either not eligible for banks’ loans or can obtain it in only limited amounts, bill discounting might well prove to be the most desirable method of financing to employ.

Factoring is somewhat similar to bills discounting in the sense that both these services provide short-term finance. Both of them discount accounts receivable, which the clients would have otherwise received from the buyer at the end of the credit period. However these two receivables financing arrangements also differ in important respects.

Despite growth of factoring some people still feel that there is a requirement for bills discounting. The prime advantages are:

1. Confidentiality: Bills discounting avoids the notification to the customers. The client’s customer remains unaware of the presence of an invoice discounter.

2. Flexibility: The client can look after his own sales ledger and select suitable invoices for discounting only when finds position necessitates this action

3. Costs: The client incurs charges only when the invoices are discounted to obtain finance. The policy is “no payment – no charge”.

EDIFACToring:

EDIFACT (Electronic Data Interchange for Administration, Commerce and Transport) is a universal set of standards and guidelines for communication by electronic data interchange. It was organized m 1985 as a result of cooperation between the North American and European standards organizations. The United Nations Organization adopts EDIFACT as the preferred method of EDI (Electronic Data Interchange) and it is the only true; worldwide, open global communication standard, and available in any part of the world to the organization, which wishes to use it. Anticipating the widespread use of EDIFACT, FCI decided in 1990 to monitor closely the trends in trade information exchanges so that the factors could continue to handle information in an optimal manner in the coming paperless environment. Thus, the EDIFACToring project was born (Deolalkar 1997, p. 16). It links with correspondent factors across the globe through satellite. The scope of EDIFACToring covers factoring communications at large: domestic factoring, international factoring, factors, sellers, debtors and banks. InIndia, SB! Factors and Commercial Services Limited, and Foremost Factors Limited have adopted EDIFACToring system (Foreign Trade- trends and Tidings 1998, p.22).

By adopting the EDlFACToring system, factors gain both in the domestic and international factoring markets. Factors make the communication standards and guidelines available to their clients and help them to implement the EDIFACT environment in their organizations. That, in turn, is able to approach large purchasing organizations and become more competitive in their pricing by cutting administration and organization costs. Moreover, in an environment where sellers and buyers exchange their communications by standard EDIFACT message (purchase order, invoice, payment and remittance), it is unthinkable for a factor to request for paper invoices

Business features of EDIFACToring:

The business features of EDIFACToring include the following:

1. All messages of EDIFACToring are customized for sending and receiving all factoring transactions.

2. EDIFACToring system includes gateways to all important private and public telecommunication networks and includes most of the common communications protocols. This feature allows each member of FC to select the most appropriate network with each partner, based on consideration of cost.

CHAPTER-III: FACTORING IN MODERN WORLD & ROLE OF FACTOR CHAIN INTERNATIONAL (FCI)

FACTORING IN DEVELOPED COUNTRIES:

Factoring is much more in use in the developed nations for the reasons viz, (a) it facilitates systematically liquidification into cash of the bills/accounts receivable; (b) it reduces investment in accounts/receivables and accelerates the turnover of accounts receivables; (c) in other words, factoring enables a business to finance the period between selling its products and receiving payments. Factoring companies make available such finance to the extent of 80% of the invoice value. Factoring company collects payments on the invoices and on collection, passes the balance due back to the business firm; (d) it also helps the ailing business. In USA factoring originated from the textile industry to help the sick industries to survive by ensuring a package of services viz. payments on guaranteed dates, expertise in realizations, quicker collections, efficient management of sales ledger.

More and more businesses around the world are switching to factoring as a means of funding their growth. World- factoring industry statistics just released by Factors Chain International (FCI), the world’s largest network of factoring companies, show wide an increase of 20% in the number of businesses using factoring in 1999. The figure now (April, 2000) stands at just under 100,000 and is up by an impressive 67% during the last three years.

The growth in the number of users of factoring has helped the industry reach a record annual volume of 573 billion Euro, an increase of 27% on the previous year. The growth has come not only from the traditionally strong markets for factoring, but in the newer markets also. Areas such asEastern EuropeandSouth Americaare seeing very healthy growth rates.Europestill represents the largest market for factoring with 61%, with theAmericasfollowing with 23% of the world’s factoring volume.

The Asian crisis that hit a number of factors two years ago now seems to be over as far as most of the Asian factors are concerned. The factoring volumes of the Asia-Pacific region grew by 29% during 1999.

The largest volume of international factoring business is conducted within the European Union but there is also significant inter-continental business between theFar EastandEuropeand theFar Eastand theUSA. The growth in international factoring continued in 1999 and now stands at just over 33 billion Euro, an increase of 25% on the previous year. The continued increase in the number of businesses using factoring is a reflection of the greater flexibility that it gives in terms of funding and credit protection. It allows businesses to offer their customers the benefits of buying on open account terms without the fear of bad debts or disrupted cash flow. It is far easier to use than traditional letters of credit and the use of the most sophisticated communications technology means that even inter­continental transactions are completed at the touch of a button.

On a positive note, the boost in the factoring industry inSingaporeandMalaysiais very much a result of the respective government’s efforts either directly or indirectly. In Singapore, factoring took off due mainly to the introduction of the low cost factoring scheme, i.e. the small industries finance scheme, whereas in Malaysia, it was the concerted effort of the Malaysian Factors Association to promote the industry and the cooperative attitude of the government to formalize common operational procedure coupled with the economic upturn in this country that fuelled factoring to greater heights. The rubbing of shoulders between Asian and European FCI member countries via international network link has resulted not only in the take off for domestic factoring, but also in a keen interest to promote the concept of international factoring towards Asian exporters.Japantook the lead followed bySouth Korea,SingaporeandMalaysia. In addition, the considerable amount of factoring professionalism today allows factors to market these relatively new services, far more effectively than in the past.

Two SAARC members,IndiaandSri Lankahave already introduced this service. InSri Lanka, factoring is now accepted as a useful financial service. InIndiaalso, factoring is gaining acceptance in the business community.

A major milestone was reached in the year 1998 by the worlds factoring industry. For the first time ever the annual volume of business handled exceeded the 500 billion USD level. Industry statistics, compiled by Factors Chain International, the world’s largest network of factoring companies, show an overall growth for the year of over 17%, taking the total volume to almost 530 billion USD. In 1999 the total volume reached almost 575 USD.

Factoring Turnover By Country in 1999 in Millions of USD

               399                                            326,306                     26,965      353,271

Factoring Turnover by Product Group

Factoring has been showing consistently high levels of growth world wide for many years now, with total volumes almost doubling in the last 6 years. In 1999 total FCI domestic factoring increased by 10.82 % and total FCI international factoring increased by 23.06 %, and the total volume of world factoring increased by 8.54 %.

ROLE PLAYED BY FACTOR CHAIN INTERNATIONAL (FCl):

FCl is a global network of leading factoring companies, whose common aim is to facilitate international trade through factoring and related financial services. FCI’s mission is to become the worldwide ‘standard’ for international factoring. FCl helps its members achieve competitive advantage international trade finance through:

a)     a global network of first-class factoring companies,

b)           a reliable legal framework to protect exporters and importers,

c)     modern and effective communication systems to enable them to conduct their    businesses in a cost-efficient way,

d)     a package of training programs

e)     standard procedures aimed at maintaining a universal quality,

f)      Worldwide promotion aimed at positioning international factoring as the preferred method of trade finance.

FCl facilitates dealings between the two Factors in different countries (where the local laws and usages and practices may be different) by setting up appropriate business standards for bilateral dealings between export factor and import factor. FCl with its Headquarters inAmsterdamoffers tremendous opportunities for exporters to export on open account terms with confidence. FCl is a non-exclusive organization open, in principle, to any factoring company. The constitutions of FCl lay down the basic requirement of membership and rules of conduct. One basic requirement is that, the factoring organization should be sponsored by a commercial bank and that it should have a minimum equity of US $ 1million.

The main objectives of FCI:

To assist their members in their efforts to simplify and rationalize the work routinely connected with international factoring business; 2) To set up business standards such that the members cooperate bilaterally in export/import factoring transactions. & 3) To be perceived as a professional association to bring together Factors which do not necessarily compete with each other.

WORKING PROCEDURE OF FCI EXPORT FACTORING:

Through there are many sophisticated nuances, the basic operations of FCI export factoring can by broken down into four main stages :

q       An exporter signs a factoring agreement with an export factor. By virtue of the agreement, all trade receivables are assigned to the factor. The factor in turn is responsible to his client for all the aspects of the factoring operations.

q       The export factor selects an FCI correspondent to act as import factor in the country to where the exports are shipped. The receivables are then reassigned to that import factor.

q       In the meantime, the import factor has investigated the credit standing of local buyers of the exporter’s goods, and has established credit lines so that the buyer can place orders for the exporter’s goods on Open Account terms ( without opening L/C).

q       Once the authorized sales take place, the import factor handles the collection of the receivables arising from them. The import factor collected in the fastest possible way.

Each of these stages is vital. In particular, the different roles of the export and import factors ensure export sales without risk.

MERGER OF FCI WITH INTERNATIONAL FACTOR GROUP:

November 13^th 2000 is marked an historic day for the world’s factoring industry. The Executive Committee of Factors Chain International and the Board of Directors of International Factors Group agreed to merge the two organizations in accordance with a predetermined time schedule. This will be subject to finding satisfactory solutions to the development of uniform rules and procedures and final ratification by the respective decision making bodies of each organization.

It is planned that the formal coming together of the two organizations will take place between October 2002 and May 2003. In the meantime teams from both organizations will be working together on developing uniform rules for cross border factoring and common operating rules between member companies. A joint team will also be working towards a common communications system, which could be introduced as soon as the new organization feels that the time is right.

The final issue will be the creation of one corporate structure. At present the two organizations have been created under different legal systems and as such each have a different legal status that means that a simple merger is not possible. The combined organization will consist of approximately 200 of the world’s largest factoring companies and will have members in over 50 countries.

“We are extremely pleased with this outcome of lengthy discussions. We still have to do a lot of work, but we see great advantages in offering the world one common standard for international factoring services. The members of our two organizations handle today already more than 80% of the world’s cross border factoring transactions so there is no doubt the standard will indeed be universal”, said Jeroen Kohnstamm, Secretary General of Factors Chain International.

CHAPTER- IV: FACTORING SERVICES IN BANGLADESH

Introduction:

q     Factoring, although new toBangladesh, has been in existence for over a thousand years in one form or another.

q       In Bangladesh, previously very limited volume of bill discounting facilities were provided by some of the banks but full-fledged factoring service was not offered by any of them.

q       IDLC is the pioneer in providing factoring of account receivable service inBangladesh.

q       The service is provided on Recourse (to the client) basis.

q       Under the service IDLC provides

–         Financing

–         Follow-up & Collection

–         Accounting & Reporting

Prospects:

q       Most of the continuous & bulk procurement in Bangladesh both in government and private corporate level is made on credit basis creating receivables in suppliers” balance sheet, thereby adversely affecting their liquidity. Factoring, a financing tool for such receivables provides the following benefits:

q       Releases cash tied up in receivables by providing 80-90% of invoice

value immediately.

q       Enables to raise funds in direct proportion to the turnover without

Collateral (most of the traditional working capital financing facility in BD is

collateral­ based).

q       Frees more time for improving sales, establishing customer relations,

product development and innovation by taking care of the follow up and

collection.

q       Saves cost by reducing staff, space since the accounting of sales is also

taken care of.

q       Also by managing the sales ledger it saves managerial time, which could

be directed towards more productive use

q       Through an organized and automated credit control mechanism it also

minimizes the possibility of bad debts

q       Historically, it was found that the modem form of factoring was developed inUSAin the 1920s, mainly to finance the growing textile industry. InBangladeshalso textile and apparels is the major thrust sector where factoring can act as key tool for working capital finance.

q       Besides, bottling & container, chemicals, fuel traders & suppliers, cargo transport, printing and packaging, clearing 8 forwarding, construction etc. may be some other sectors where factoring may play pivotal role for working capital finance.

q       Hence given the existing scenario in Bangladesh Factoring of Accounts Receivable appears to have good prospect.

Marketing:

q       Historically people are resistant to changes.

q       Factoring being a new concept in BD has been under critical scrutiny from most of the entrepreneurs.

q       Hence market penetration appears to be pretty time consuming and substantial effort is required to attract an entrepreneur.

q       However, major focus should be on Small and Medium sized businesses with:

• Strong Customer Base
• Good Record with Customers
• Sound business track record
• High growth potential
• Efficient Management

Factoring Portfolios:

[source: IDLC Finance Limited; From 2000-2007]

Threats:

q       Competition from traditional source of working capital finance

q       Misconception on the seller’s part apprehending strained relationship with the buyer

q       Reluctance on buyer’s part to get involved in this kind of tripartite arrangement

q       Fake bill/ direct payment through the collusion between the buyer and the seller

q       Default in payment by the customer

q       Discounting facility offered by the buyer himself

q       Government policy and legal framework (particularly in case of International Factoring) necessitating submission of L/C documents to obtain government incentives.

CHAPTER- V:INTERNATIONAL FACTORING: PROSPECTS OF BANGLADESH

Introduction

Now a day, Factoring is considered to be a very useful financial package all over the world. It experiences a vast turnover since it particularly serves the financial needs of the small and medium size businesses. It has become well established in developing and highly industrialized countries as well. The Americasand Europehave now fully mature factoring industry. Worldwide factoring industry experiences strong growth despite difficult market conditions. Fresh statistics for 2001 show a 12% growth for worldwide factoring according to the latest figures for the industry just released by Factors Chain International (FCI), the world’s largest network of factoring companies with a presence in some 60 countries. Although 2001 will be remembered as a year with very difficult market conditions and recessional trends in many countries, factoring volumes continued to grow and outperformed most other sectors of the banking and financial services industry. World domestic factoring stands now at a volume of some 670 billion euro, while the cross-border or international factoring volume is close to 50 billion euro, figures which are more than double from five years ago.  The largest market continues to be Europe, which represents 65% of world volumes, followed by the Americaswith 22% and the Asia-Pacific area with 12% of world volumes.  Strong growth was seen in particular in emerging economies in Central Europewith Poland, CzechRepublic, the Baltic States, Hungaryand Slovakiaas prime examples.  Even stronger growth was seen in some of the Asian countries, pushing Taiwanto second position behind Japan, India(+50%) and China, showing an impressive 600% growth. The members of FCI represent nearly 60 countries and handle over 52% of the world’s international factoring volumes and 44% of the total factoring volume worldwide.  FCI’s continued strength in cross-border factoring is a further indication that more and more businesses are switching to international factoring as a means of moving away from letter of credit terms to open account trading. Importers are now demanding more favourable payment terms and factoring allows exporters to move to open account with a period of credit without fear of bad debts or overseas collection problems.

Factoring business: Trends and Growth

Factoring is growing in significance, especially in the context of the globalization of trade and Finance. To measure the performance of global factoring, Compound Growth Rate (CGR) with the help of linear regression mode has been calculated. Table I shows the global factoring business during the last 11 years.

World Domestic Factoring

Domestic factoring dominates market share in the total factoring business, as the market share of domestic factoring in the total factoring business of the world between 1991 to 2001 has ranged between 92.97 percent to 94.42 per cent (Table 1). The amount of world domestic factoring was US$ 655779 million during the year 2001 as against US $ 250626 million during the year 1991. It is also seen from the index number of the table that world domestic factoring volume has increased 2.61 times over the referred period (11 years). The compound growth rate comes to 11.52 per cent.

World International Factoring

Table I reveals that the quantum of international factoring is meager compared to the domestic counterpart. The share of international factoring ranges only from 5.58 per cent to 7.03 per cent of total world factoring during the reference period. In absolute terms, it reached US $47,130 million in 2001 as against US $15744 in 1991. It is also seen from the Table that the world international factoring has gone up by 2.99 times in 11 years, which is slightly higher than that of world domestic factoring. The compound growth rate is also showing a higher percentage (12.97 per cent) as compared to that of world domestic factoring.

World Total Factoring Volume

The total world factoring volume is US $ 702909 million in 2001 as against US $ 266370 million in 1991. A look at fixed base index numbers of the world total factoring in Table I indicates that it has gone up by 2.63 times during the time span of 11 years. The compound growth rate of world’s total volume comes to 11.62 per cent. Growth is, therefore, being experienced in both domestic and international factoring. However, world international factoring accounts for a higher growth rate than that of world domestic factoring although the share of international factoring in the world total is still very small. International factoring survey 1998 states that international factoring is growing considerably faster than international trade (1998, p.5). FCI, in its press information, tries to explain the reason behind it and states that it is apparent that more and more business generated in countries ofAsiais now looking to push their exports in markets outside the region, for example,EuropeandNorth America. A more impressive example of this development is observable inJapan, where factored exports toGermanyhave grown by a staggering 51 per cent on 1996.

Source: World Factoring Year Book, 1999, 2000.

Factors Chain International (FCI)

Global Factoring Business: Distribution of Factoring Companies

The growth of factoring is illustrated by the large number of companies along with the large volume of business. Table 3.2 shows the continent wise distribution of factoring companies. The total number of factoring companies in the world stands at 995 at the end of 2001. However, at the same timeEuropeaccounts for 427, which is the highest among all continents.Americasregisters the second highest expansion with 392 companies. The other continents likeAsia,Australasia, andAfricaaccount for 104, 28 and 14 companies respectively.

The index in the Table 3 reveals a moderate continent –wise growth rate of index in 2001 likeEurope(175.72),Asia(92.04),Americas(127.27),Australasia(127.27) andAfrica(233.33). The compound growth rate of the number of continent-wise factoring companies shows an upward trend exceptAsiain all the continents with a compound growth rate for world total 4.28 per cent.Africa(7.06%) accounts for highest CGR followed byAmericas(6.74%).

Source: World Factoring Year Book, 1999, 2000.

Factors Chain International (FCI)

Major Findings

Factoring is expanding in all parts of the world. The compound growth rate of world total factoring volume is 11.62 per cent during the time span of 11 years. Of this, the compound growth of world international factoring is 12.97 per cent and that of world domestic factoring is 11.52 per cent. However, domestic factoring dominates the market share in the total factoring business .The share of domestic factoring is between 93.01 percent to 94.42 per cent of total factoring business during the reference period. These findings support my hypothesis that international factoring is growing worldwide over the years.

Implications for Bangladesh

International factoring is getting popularity impressively. International Factoring Survey (1998, p.3), Khonstamm  (1999, p.3) mentioned that international factoring is being introduced into more and more countries whose exporters turned their back in the letter of credit. Apart from this, regional economic co-operation has emerged as a major economic arrangement for the global economic integration.Bangladeshhas participated as an active member of South Asian Association For Regional Co-operation  (SAARC), South Asia Preferential Trade Agreement (SAPTA), Colombo Plan, etc. This has created possibilities for increasing the cross border trade among the countries of the region through land and sea routes. It will result in bright possibilities of trade on open account terms’ under factoring service. So,Bangladeshcannot keep herself away from this growing financial service. It is expected that factoring could prove to be mutually beneficial to, both bankers and manufacturing sector. In one hand, export-oriented manufacturing sector can get benefit from the wide range and flexibility of international factoring services; on the other hand, bankers would be assured of readily available substantial business from the export-oriented manufacturing sector. In this perspective, it is felt that it will be of great assistance to the entire industrial and trading sectors if factoring services are introduced inBangladesh.  Moreover, the introduction of export factoring inBangladeshwould provide an additional window of facility to the exporters. There is, therefore, no need to keep any reservation in introducing international factoring inBangladesh. Bhattacharya (1997, p.l48) and Choudhury et.al. (1995, p.27) have suggested that factoring services should be introduced in order to facilitate economic growth as well as to ensure financial discipline inBangladesh. It is positive that some financial institutions ofBangladeshare already thinking about the factoring services. However, such a system can sustain only if a conducive environment is created and a professional approach is taken. Bangladesh Bank can take suitable actions for policy initiatives for launching international factoring services.  An urgent attempt is, therefore, required to be taken to look into various aspects of factoring such as scope, procedure, organization, legal issues, funding, pricing, accounting, credit rating and managerial issues. These will provide a helpful direction to the government, policy makers, bankers, manufacturers, traders and other authorities that can intimately involve in launching this financial service in the country.

PROSPECTS OF INTERNATIONAL FACTORING IN BANGLADESH:

Bangladeshis a developing country with a huge population. It faces balance of payment crisis frequently. In fact it suffers from trade deficit resulting from higher import than its export. Its export sector comprises mostly of non-traditional goods. And market of the exports fromBangladeshis highly concentrated. Though there are many facilities for the exporters it is not rising as it is expected.

InBangladesh, one of the biggest problems of exporters is finance. Although a battery of institutions provides financing facilities to the exporters, yet the procedures are bothersome and time-consuming. Moreover, the quantum of credit they receive is also insufficient. Besides many good firms restrict themselves to the domestic market because of the obvious fears in the international trade (Banerjee, Prashanta. Kumar. 1999, pp. 204).

In the parlance of factoring, ‘International Factoring’ and ‘Export Factoring’ have often been used synonymously. This is because international factoring has developed through out the world as a financial product to supplement traditional export financing techniques mainly at the post-shipment stage. However, with the development of the international trade on a two-way level, export factor has also become import factor at the time of imports within their countries. Therefore, here it is tried to evaluate the prospect of export factoring inBangladesh.

Trends in Export Finance inBangladesh

Sengupta et. al. (1999) has concluded that export credit is directly proportionate to the growth in exports and factors affecting exports determine export credit requirement as well. These factors at macro-level include exchange rate of taka, availability of incentives and others. However the amount of export can be considered as the single most important factor determining export

finance. The relationship between the exports and export finance for the last 10 years is given in Table 5.1

Source: Export Statistics, 2000-2001

Above table reveals that export finance constitutes, on an average, 19.30%of the total export of the country. It can therefore be safely concluded that 1/5^th of the total exports of the country have been financed by the banking system.

Regression Analysis Explaining Export Finance

To explain the relationship between export and export finance available inBangladesh, a linear regression equation has been estimated by Ordinary Least Square (OLS) method. This regression analysis was performed based on 10 year’s (From 1991-1992 to 2000-2001) data. The purpose of running regression was to:

• To determine whether the export is the important determinant of export finance.
• To project the export finance requirement for the next 10 years.

Where,

Exp Fin = Export finance

Exp = Export

The estimated model is summarized:

=0.921

F- Statistics = 207.55

D. W. statistics =0.836

No. of observations = 10

The above equation has turned out to be highly significant. Moreover, it explains 92.1% variation in export finance ( = 92.1%). The model implies that 1% increase in export will result in 0.96% increase in export finance.

Projection of Export

Besides, micro factors like productivity, quality and marketing efforts, growth ofBangladeshexport in the coming years may depend on many macro factors like:

• Continuity of government’s export promotion policy.
• Profitability in the international market.
• Recovery of economic growth in the industrialized countries.
• Extent of pressure on the balance of payment position.
• Ease (or difficulty) in availability of external finance.
• Extent of competition from the other countries.

Notwithstanding the constraints as mentioned above, there are bright prospect of accelerated export growth ofBangladeshin the upcoming years. Based on the above proposition, an attempt has been made to project the export for the next 10 years assuming 15%, 20%, and 25% growth. And projected export in the three situations is shown in the Table 2.

Projection of Export Finance

Demand for ‘Export Finance’ for the next ten years has been projected using the regression model developed in the Table 2. Export figures projected above have been used to estimate export finance requirement. The formula used here is as follows:

Where,

Exp. Fin = Export Finance and

Exp = Export

Projection of Export Factoring:

On the basis of projected export finance demand, potential for export factoring is evaluated. Under the three scenarios of export finance demand that were projected shown above, assuming 20% (1/5^th) of the total export credit demand being supported by international factoring, the potential is shown in Table 7.

Table 5.6: Projected Export Factoring Potential Under Three Scenarios

                                                                       (Amount in Million US $)

Other Factors

International Factoring is yet to be introduced inBangladesh. It would be wise to examine all factors that directly influence the prospect of international factoring. The following factors deserve in-depth study in this regard:

• Effectiveness of existing exports financing system inBangladesh.
• Potential benefit of international factoring.
• Comparative cost of factoring and traditional export financing.

Government ofBangladeshprovides various facilities to the exporters so that they can sell their product in the international market. A lot of export promotion activity is in operation now. Nonetheless the issue is whether there are enough prospects for international factoring, if introduced inBangladesh. The argument that can be cited here is that the very idea of introducing a new product in the financial market is to open up a new window of service with some new feature. This approach is likely to induce a sense of competition within the market that results in better efficiency.

Some unique benefits that exporter will enjoy are:

q       International factoring is a continuing arrangement while traditional international trade financing techniques (L/C) is transaction based.

q       Exporter can sell abroad on open account term, the most buyer-friendly mode of trade payment.

q       Exporter can realize the proceed immediately after the shipment of the goods.

q       Exporter can enjoy credit risk protection.

In regard to the comparative cost, initially, cost of international factoring will be higher by a small amount than L/C. But it will be reduced when factoring company will achieve economy of scale. More importantly, if cost gets less consideration, exporter will get a package of services that incorporates sales ledger maintenance, bad-debt protection, financing etc. under “one roof”. So exporter will not be required to avail fragmented services from different provider

CHAPTER-VI: Operational Guideline on Domestic Factoring in Bangladesh

Factoring is ideally suited to finance receivables of SMEs who generally suffer from shortage of working funds. Introduction of factoring will therefore go a long way in overall development of the SME sector and thereby the overall economy of the country.

The operational guideline on domestic factoring has been prepared with a view to providing a framework of operating guidelines for practitioners as also for the users of factoring facility, particularly SMEs. This chapter illustrates the legal framework that has been formulated by the Core Committee On Factoring and Consultative Committee On Factoring, regarding the operational practice of factoring (domestic) services inBangladesh.

These guidelines are general in nature and each factoring organization need to adopt it with or without modification as the case may be depending on their specific work environment and work practices.

The guidelines have been organized into the following five sections:

1)    Description of product “Factoring “and how it works

2) Policy Guidelines

2.1) Factoring Guidelines

2.2) Credit Assessment

2.3) Organization Structure & Segregation of Duties

2.4) Approval Authority

2.5) Internal Audit

3) Procedural Guidelines

3.1) Credit Evaluation

3.2) Approval Process

3.3) Credit Documentation

3.4) Credit Administration

4) Risk Analysis and Mitigation

5) Pricing Guidelines

 1) DESCRIPTION OF PRODUCT “FACTORING “AND HOW IT WORKS

Factoring is a contract between a “Supplier”and a “Factor” wherein:

a) The supplier assigns its receivables to the factor

b) Notice of the assignment of receivables is given in writing to the debtor (buyer)

c) The factor performs at least two of the following services:

i) Financing by way of prepayment against invoices

ii) Sales Ledger maintenance

iii) Collection of receivables

iv) Credit protection of bad debts against insurance, if available.

The factoring process comprises of:

a)      Placement of order by buyer on seller

b)     Seller approaches factor for approval of factoring facility

c)     Factor approves the facility

d)     Debtor confirms direct payment to factor against assigned invoices subject to fulfillment of trade terms by seller

e)     Seller dispatches goods to buyer

f)      Seller assigns invoices in favor of factor

g)     Seller informs buyer in writing of assignment of receivables

h)     Factor disburses prepayment to seller

i)       Buyer pays to factor on due date

j)       Factor refunds balance to seller after recovering prepayment and discount & factoring charges

A comparison of conventional Bill Discounting and Factoring is given below:

As factoring is serviced by invoice backed dedicated cash flow as opposed to consolidated cash flow of borrower as in the case of conventional lending, it is inherently less risky from a credit point of view.

Factoring is somewhat similar to “Work Order financing “which is quite popular inBangladesh. The difference being that in Work Order Financing, the lender takes performance risk on the entire business cycle of its client where as in factoring the risk is restricted to post shipment performance only. Work Order Financing is generally popular in construction contract and/or agency sales where as factoring is possible in all trades.

Factoring is ideally suited in situation of open account sales involving continuing relationship and in case whole turnover in respect of a buyer is assigned in favor of factor. In factoring since small suppliers are financed, it can command better pricing than direct lending for the same corporate (buyer) credit risk.

Reverse Factoring is a financial instrument in which the invoices of suppliers duly accepted by the client (buyer) are factored. In case of reverse factoring the client is the buyer as against the client being seller in case of normal factoring and the factoring agreement is between the buyer and the factor. In case of reverse factoring since funds are released to suppliers after the buyer (client) duly accepts the invoices, the performance risks of the suppliers are obviated and the only risk is the credit worthiness of the buyer.

A flow chart of reverse factoring business is given in Appendix II.

It is recommended that banks and financial institutions inBangladeshshould start factoring with suppliers of their existing creditable clients as also reverse factoring of the purchases of the same clients. Thereafter banks and financial institutions should target the suppliers of other credit worthy organizations who are not their existing clients.

 2) POLICY GUIDELINES

The policy guidelines suggested in this section covering all functional aspects of factoring are outline general principles to manage factoring business. Each factoring organization needs to formulate its own specific policy guidelines for factoring business based on a variety of factors, such as, prevailing financial market condition, regulations in force from time to time, competition, business strategy, corporate culture & values, etc.

Specific policy guidelines should be approved by the Board of Directors of the factoring organization.

2.1 Factoring Guidelines

The factoring guidelines should provide the key foundation for marketing / relationship managers to formulate their marketing plan and should include the following:

•   Industry and Business Segment Focus

Based on prevailing business and industrial climate, the guidelines should clearly identify the trade / industry / service sectors that should constitute the factoring portfolio. The factors should establish specific trade / industry / service sectors exposure caps to avoid over concentration in any industry/service sector and thereby diversify risks. Based on sectoral exposure caps , the management should issue clear instructions from time to time of factor’s appetite for growth or otherwise( for example, Textiles : maintain, Services: grow , Construction: shrink, etc ). The sectoral exposure caps should be reviewed and adjusted, if necessary based on changing business climate at regular intervals.

• Single Client/Group Limits

Factor should establish single/group exposure limits based on prevailing regulations, if any, and its own financials. Factors may wish to establish conservative criteria based on its own assessment of its overall client profiles.

•   Single / Group Sales Ledger Limits of debtors

Factor should establish single / group debtors exposure limits based on assessment of each debtor. For this purpose the factor should design a debtor scoring model.

• Discouraged Business Types

Factors should outline trades or services that are discouraged, such as, perishable food items, software related services, business process outsourcing (BPO), etc.

Further factoring should be discouraged for trades between group companies and should be avoided when there is two way trade between parties.

• Factoring Facility Parameters

Facility parameters should be clearly stated. The parameters are:

i)                   Maximum outstanding amount (Fund-in-Use) in respect of single client.

ii)                Individual debtor sales ledger limit

iii)              Debtor wise prepayment percentage

iv)               Debtor wise invoice tenor (credit periods could vary from buyer to buyer). It is suggested that tenor is decided on a realistic basis of actual trade credit period.

v)                  Debtor wise facility pricing – discount rate of prepayment, factoring charge on invoice value

vi)               Upfront one time set up fee for client

vii)             Penal interest for delayed payment; this will not arise if non payment by debtor on due date is adjusted against fresh invoices of the same debtor or payments of other debtors whose invoices are also factored

viii)          Covenants

IX) Security

X) Global limit on each buyer

Credit Assessment

The credit risk of a factoring business is distinctively different from that of conventional lending. The credit risk of factoring comprises performance risk of client (seller) and credit / payment risk of buyer as against credit risk of client in case of lending. Thus in case of factoring the risk focus is on the transaction and not on balance sheet of the client.

In light of above, credit assessment of factoring comprises of three parts:

i)         Assessment of performance risk of client (seller)

ii)        Assessment of financial health and payment record of debtor

iii)        Assessment of trade reputation and financial health of client (for eventual recourse, if required)

It is recommended that client (seller) should be encouraged to factor invoices of more than one debtor as spread of debtors minimizes risk.

The result of these assessments should be documented by the relationship manager and thereafter scrutinized and vetted by the credit department.

2.3 Organization Structure & Segregation of Duties

Factoring business should ideally be set up in a separate corporate entity. It could be a stand alone factoring company or a subsidiary or a Joint Venture of a commercial bank or a financial institution.

In case under compulsion it has to be set up as a department of a bank or financial institution, a separate demarcated organization should be set up for factoring business to be successful. The need to set up separate organization arises from the fact that the nature of risk in case of factoring is very different from that in case of conventional lending and which in turn necessitates a different mindset for the organization.

The following chart is a typical organization structure for factoring business

The responsibilities of the above functions are as follow:

Relationship/Marketing Management

q       Market factoring as a product

q       Maintain relationship with clients on an ongoing basis

q        Communicate with client at each subrogation

q       Keep abreast with industry / trade knowledge and current information of business trends of client(seller) and debtor(buyer)

q       Responsible for timely and accurate submission of factoring proposals and annual reviews to credit department for scrutiny and independent evaluation

q       Give market feedback to Chief Executive and other departments

q       Negotiates with the clients on facility parameters, such as pricing, debtor limits, fund-in-use, etc.

Credit & Risk Management

• Independently scrutinize and vet the factoring proposals prepared by the Relationship management..

• Recommend to the approval authority to approve or disapprove a proposal

• Oversight of factoring policies, procedures and controls relating to credit risk.

• Oversight of quality of factoring portfolio.

• Periodical review of factoring portfolio.

• Advise the Chief Executive on need to review existing guidelines on credit & risk management.

Credit Administration Management

• Ensure that facility documentation including specific covenants and security are executed in compliance with terms & conditions of approval and same is enforceable.

• Scrutinize each invoice in all respects to ensure validity of invoices.

• Authorize release of prepayment and ensure that aggregate prepayment at any point of time is within the sales ledger limit of each debtor and within the overall limit of the facility.

• Monitor repayment i.e., receipt of payment from debtors against invoice on due date

• Follow up with client Debtor in case of delay in receipt of payment from debtors

•Recommend recourse to client / enforcement of security for recovery of bad debts

•Custodial duties

• Compliances

Factor should clearly segregate the above functions as suggested above. The purpose of segregation is to improve knowledge levels and expertise in each function on one hand and avoid conflict of interest and diffused accountability on the other.

In case of stand-alone factoring companies, in addition to the above business functions, there would be support functions, namely, Resources and Treasury, Human Resources, Information Technology and Legal.

Resource and Treasury Department’s job will include mobilization of resources on best terms, idle fund management, asset & liability management and advising top management on cost of capital and product pricing.

Human Resources Department will focus on training of personnel, organizational development and designing appropriate performance appraisal and compensation systems.

Information Technology Department assumes great importance in factoring business as factoring involves management and control of a large number of invoices on a continuous basis. Successful operation of credit administration function is highly dependent on having a robust IT platform. The department will also be responsible for creation and maintenance of factor’s website.

Legal Department will work on design/ improvement of various documents, legal notices, court cases and company law matters.

Approval Authority

The authority to approve factoring facility must be clearly delegated to Chief Executive and /or any other senior executive and /or a Committee of Senior Executives as may be deemed fit by the Board. All delegations must be recorded in formal minutes of the Board Meetings. The degree of delegation will however be a function of the size and geographical spread of the organization and could therefore vary from one factor to another.

Marketing / Relationship management should not have any approval authority in view of inherent conflict of interest.

Internal Audit

Internal audit is very crucial for factoring business more so because factoring involves handling and tracking of large number of invoices. Internal audit will conduct independent inspection of credit approval reports, facility and security documents, random invoice scrutiny, release of prepayment, recovery, etc so as to ensure compliances of policy guidelines, operating procedures, regulations, etc. Internal Audit will report to the Chief Executive /Audit Committee of the Board.

Chapter-VII: PROCEDURAL GUIDELINES

This section covers the procedural aspects of management of different functions of factoring business. The guidelines contained herein outline general practices and would need to be adopted by each organization with suitable modifications, where necessary depending on business environment, existing regulations, availability and access to financial and trade information, etc. 

Credit Evaluation

As mentioned earlier, credit risk of factoring business comprises of:

i) Performance risk of client (seller)

ii) Credit & payment risk of debtor (buyer)

iii) Credit risk of client (seller) in the eventuality of recourse

It is recommended that the factor could design an Application Form for its clients which will enable the factor to capture in one shot all required information for processing and thereby reduce the processing time. A specimen of factoring facility “Application Form” is given in Appendix III

Performance Risk

For assessment of performance risk, the factor should conduct an audit/analysis of past data of sales ledger of respective debtors. It involves tracking “invoice to cash trail” of historical data available with client. Invoices selected at random should be checked and the audit should highlight:

a)      Years of relationship between buyer and seller

b)     All instances of delayed payment, if any, extent of delays (past due date) and reasons for delay should be mentioned

c)     In case of dilutions, the extent and reason for dilution should be highlighted

d)     Defaults of any nature are to be highlighted with complete details

e)   Check whether there are two way trades between buyer and seller

Factoring is not recommended in respect of those debtors where there exist two way trades with seller.

Besides audit of sales ledger, the factor should make independent trade enquiries on the client and the debtor with their respective suppliers/customers/dealers/distributors/trade bodies as appropriate.

Based on above analysis, a Debt Collectibility Rating comprising debtor mix, payment performance of debtors, length of relationship with debtors and level of rejections/dilutions should be designed and adopted by each factor.

A specimen Debt Collectibility Rating Model is given in Appendix IV

Credit & Payment Risk of Debtors

Each debtor needs to be evaluated from a credit & payment risk perspective based on following:

a) Industry Competency

•      Quality of management & experience

•      Competitive position in the market

•      Types of industry

b) Transparency & References c) Financial assessment

d) Debtor payment practice

For credit risk assessment of prospective debtors, factor should, as far as possible, access credit information from Credit Information Bureau (CIB) of Bangladesh Bank. It is recommended that Bangladesh Bank facilitates easy access of information from CIB by authorized factors.

Obtaining above information on debtors is not an easy proposition. The factor should therefore follow an investigative approach to assess the above attributes to overcome the deficiency of limited available information.

Based on above assessment, a Debtor Rating Model may be designed and adopted by each factor. A specimen of a Debtor Rating Model is given in Appendix V.

It may be noted that the factor should also set a global exposure limit on each debtor in respect of invoices raised and factored by various clients (suppliers).

Credit Risk of Client (Seller)

Credit risk assessment of the client (seller) is undertaken primarily to mitigate the residual risk in case of non payment by debtor on account of trade disputes or deterioration of financial health of debtor and consequent recourse of the facility on the client(seller). The credit risk of the client (seller) is assessed on the same basis as that of the debtor as stated above.

In factoring the credit risk of debtor is far more important than that of client as the primary responsibility of payment to factor lies with debtor.

It may be noted that recourse to client (seller) should happen only as a last resort. Normally non payment in respect of any invoice should be adjusted against margins in other invoices as also against future invoices. It is recommended that the factor should always explore to have more than one debtor to spread risk as also adjust non payment of one debtor against invoices of another debtor. A suitable clause for assignment of whole

Turnover (debtor specific) and set off of dues amongst various debtors would reduce incidence of recourse.

Based on above evaluation, a credit approval 1 appraisal report is prepared.

Approval Process

After the approval report is prepared, it is independently scrutinized and vetted by the Credit & Risk management department with particular reference to authenticity of data, oversight of due diligence carried out, compliances of guidelines, etc. Credit department should add its own independent comments and recommendation to the approval authority to approve or disapprove a proposal. The proposal is then put up to the approving authority for consideration. The minutes of the decision of the approval authority should be properly documented including all particulars of the facility and special terms & conditions, if any. Based on the minutes, a facility approval letter is issued to the client (seller).

All documents should be stored in a manner so that retrieval is easy. Legal documents should be kept in safe custody.

A specimen of a factoring approval letter is given in Appendix VI.

Credit Documentation

Factoring documentation will comprise of:

Accounts Receivable Management Agreement (factoring agreement) : The agreement is similar to a loan agreement and would include the names of the approved debtors and debtor wise details of facility approved ( sales ledger limit , price _.-prepayment %, tenor, etc) and overall fund-in use ( outstanding exposure limit on the client).

The agreement will also provide for clauses relating to assignment of invoices, notification to debtors, undertakings and warranties, obligations of client in case of disagreement with debtors, appropriation of receipts, accounting procedures, penal interest, power of attorney, indemnity, events of defaults and remedies, etc.

Debtor Introductory letter: a letter from the debtor addressed to the factor acknowledging the client (seller) as an authorized supplier and agreeing to directly pay the factor on assignment of invoices on due dates subject to fulfillment of trade terms by the supplier.

Tying the debtor for direct payment to factor could be also in the form of legal undertaking on stamp paper from debtor to this effect or against bills of exchange/ co-accepted bills/inland letters of credit as may be negotiated between the buyer and the factor.

•   Special Undertakings, if any

•   Demand Promissory Notes

•   Notarized Power of Attorney in favor of factor

•      Postdated cheques. It could be for total facility or could be a set of cheques based on debtors/invoices

•      Personal guarantee(s) of proprietor / partners / principal directors of the client (seller)

•      Pledge/hypothecation /mortgage of assets, if collateral is stipulated by the factor

A specimen of Notification of Assignment of invoices is given in Appendix VII.

The assignment of receivables should be registered with Registrar of Joint Stock Companies, if feasible.

Credit Administration

After all documentation has been completed in all respects, the facility is ready for utilization. The client will forward the assigned invoices, as and when they are generated on dispatch of goods to the factor for prepayment. The notice of assignment should bear the client’s stamp and should be signed by an authorized signatory. The client would need to send copies of delivery chGlla,i and VAT challan along with the invoices. The credit administration department will scrutinize these documents for its accuracy of information and enforceability. An indicative check list for scrutinizing an invoice is given in Appendix VIII. Thereafter the prepayment will be made. It is recommended that the prepayment cheque is drawn favoring the principal bank of the client as “XYZ Bank A/C

Client”. The purpose of this is to keep the principal bank of the client aware of the factoring facility being availed so that there is no double financing of the assigned receivables.

As mentioned earlier, charging of Set up fee is optional and is negotiable between the client and the factor. Set up fee is payable upfront on signing the agreement and before commencement of prepayment. It could be received as cash or debit to factoring account. Discount charges are levied at monthly intervals, based on day to day outstanding drawn position while the factoring charges are levied at the time of prepayment of each invoice.

Credit administration needs to keep track of each factored invoice for payment by debtor on due date. A grace period of 15 to 21 days past due is given after which it is recoursed against new invoices of same debtor or payment (margin portion) made by other debtors. Failing this, invoice based post dated cheque collected from client at the time of prepayment may be enchased to recover overdues. Overdues beyond the grace period would attract penal interest, which should be 2% over the document discount rate. Credit administration will maintain debtor wise sales ledger of each client and sent monthly statement to clients. In due course the client may be given online access to the sales ledger.

Credit Monitoring 8 Recovery processes and classification of factored assets including provisioning for bad and doubtful debts/non performing assets will be governed by the same regulatory guidelines as applicable to normal loans (overdraft /bill discounting).

Sales Ledger Administration

The factor usually takes the responsibility to maintain the sales ledger of the clients in respect of debtors whose invoices are factored. The major responsibilities in this regard are as follow:

q       Maintain sales ledger in a proper manner updated online with latest invoices, prepayments and cash received.

q     Persistent efforts are made to collect dues on due dates through personal contacts, letters of reminders, telephone messages, etc.

q    Ensure monthly statements are sent to clients.

q       Remit or give credit to client account in respect of retention amounts after collection of dues.

q       Maintain close liaison with client and debtors to resolve various trade disputes that could arise from time to time.

q       Keep unallocated credits to a minimum.

q       Review sticky accounts regularly and follow up action.

q       Submit MIS report to management on details of overdue, cheques returned, unallocated cash receipts, inactive clients/buyers, disputes, legal cases, etc.

A robust IT platform is an essential pre requisite to administer, monitor and recovery of credit. As for SMEs, the invoices size by value will be generally small, factoring business entail processing and tracking of large numbers of invoices and hence the importance of IT platform.

Chapter-VIII: Risk Analysis and Mitigation

As mentioned earlier, factoring business involves two primary risks – performance risk of seller (client) and credit & payment risk of debtor. The residual risk, on recourse, hinges on creditworthiness of the seller (client). Analysis and evaluation of these risks are covered in section 3.1.

The other generic risks include defective/false/fake invoices, direct payment by buyer to seller in spite of assignment of receivables and seller not routing all invoices through the factor.

Risk mitigation methodology will include:

1) Proper evaluation of invoice to cash trail of sales ledger

2) Evaluation of financial statements of buyer

3) Trade inquiries

4) Appropriate & enforceable documentation (factoring agreement, demand promissory note, directors personal guarantees, power of attorney, post dated cheques, etc)

5) Special conditions, such as, whole turnover clause, set off clause amongst debtors,

etc

6) Proper scrutiny of invoices

7) Effective online credit monitoring

8) Legal actions

Chapter-IX: Pricing Guidelines

Pricing for factoring facility is generally structured in two parts:

a) Return on fund employed — discount charge

b) Charge for services provided – factoring charge

The discount charge is fixed on the basis of cost of funds, pricing of competitive products (overdraft, etc) and merit of each proposal.

The factoring charge is based on number of services provided (such as, collection, sales ledger maintenance, credit protection, etc) and is usually a small percentage (0.1 to 0.5%) of invoice value subject to a minimum amount per invoice.

CHAPTER- X: FACTORING IN THE BANKING SECTOR

INVOLVEMENT OF BANKS IN FACTORING BUSINESS:

In theUnited States, there had been a link between factoring and banking since the First World War, but there was some doubt about the legitimacy of this occupation for commercial banks inAmericauntil, in 1963, the US Comptroller of the Currency ruled that the national banks had authority to engage in factoring business.

Twelve American banks entered into factoring activities in the five years from 1965 to 1970. Since then many more banks have entered the field, to such an extent that most factors throughoutAmericaandEuropeare now owned by or associated with banks.

Notwithstanding the developments in America, it came as something of a surprise to the financial world when, in 1968, the then National Provincial Bank acquired through its subsidiary, North Central Finance, 75 percent of the capital of Portland Group Factors, a company which had been founded five years earlier and which had helped to pioneer factoring services in the United Kingdom. The venture was not entirely successful, partly because of the troubles afflicting a number of the earlier factoring operations in this country, and on the merger of National Provincial Bank with Westminster Bank there was a major reorganization. In 1970, an entirely hew company was formed, Credit Factoring, and by 1971 this was fully operational having taken over the residual business of Portland Group Factors. The new company concentrated on sales accounting and credit protection rather than the advancing of funds, and it was perhaps this aspect that enabled good progress to be^: made in attracting larger companies which Were hot particularly seeking additional sources of finance. Through an associated company, Credit Factoring international, the National Westminster Bank group was the first of the British banks to move into international factoring and at the end of 1974 the bank’s chairman was able to report that Credit Factoring International ‘has established itself as a leading company in its field’.

The first step by National Province Bank was a momentous one. In many ways it was seen as a complete departure from traditional banking, but in other respects it displayed a rationale, which has not always been apparent in relation to other services. Three essential aspects of factoring, viz. detailed administration on a large scale, credit assessment and provision of funds, were all familiar to traditional bankers, and in the event factoring has proved to be a natural and complementary development of the older services.

An international factor, originally Towergate Securities, is a factoring company formed in 1960 by Tozer Kemsley & Millbourn, M.Samuel & Co. (now part of Hill Samuel) and the First National Bank ofBoston. It was to become the largest of the factoring operation before the clearing banks entered the scene, and in 1968 Lloyds Bank and the Royal Bank of Scotland (through their joint subsidiary, Lloyds and Scottish Finance) acquired a 70 percent interest (later to become a 75 percent interest) in International Factors. Of the original shareholders, only the First National Bank ofBostonremains, with 25 percent of the equity. By 1977, International Factors had 140 clients. As the name implies, the company has developed internationally and is now part of a worldwide network.

The Midland Bank group moved into factoring in 1970 jointly with the First National City Bank of New York, but the new offspring, Midland-Citibank Factors, grew but slowly and in 1973 Midland Bank bought out their American partners and transferred the factoring business to Shield Factors, in which Midland Bank acquired a 50 percent interest jointly with one of the original shareholders of Shield, the Anglo-African Shipping Company. The following year, Midland Bank acquired the Anglo-African shareholding and thus Shield became 100 percent owned by the Midland Bank, the name having been changed to Griffin Factors, and at the present day it is third in the field among the clearing bank factoring companies in terms of total annual volume.

Along among the clearing banks, Barclays Bank chose to develop their factoring business from within their own organization rather than by purchase of an existing operation or by way of a joint venture with a partner. A factoring division was set up in the bank’s subsidiary company, Barclays Export & Finance Company, and it embarked on a steady programme of expansion under the trade name, Barclays Factoring. Barclays Bank already had an interest, however, in Mercantile Credit as a result of their acquisition of Martins Bank, and Mercantile Credit had been engaged in a factoring operation since the late 1960s. After the acquisition by Barclays Bank in 1976 of the Balance of the equity of Mercantile Credit, it was appropriate to rationalize the factoring operations and they were brought together in a new subsidiary, Barclays Factoring, on 1^st October 1978.

In India, the RBI constituted a study group (1988) headed by Shri C.S. Kalyanasundaram, former M.D of SBI to examine the feasibility of starting factoring services in India. On the recommendations of the group Banking Regulations Act was amended in July 1990. for this purpose RBI directed that factoring services be provided by banks through separate subsidiaries. The State Bank of Indiawas first to lunch the factoring services in India. Reserve Bank of Indiaby their letter dated 19^th February, 1994 has allowed all banks to enter into factoring business.

THE BANKER- FACTOR RELATIONSHIP:

In former days, a banker would not always view with equanimity the news that his customer was factoring his debts. There would be a vague assumption that the customer was in extremis and that in some undefined way the customer’s last remaining assets were disappearing through the window. In fact, a customer in such dire circumstances would be operation-it is not finance of past resort.

In similar vein, the banker of bygone years did not like to think that his customer was obtaining finance from any other source but himself. Here again, time have changed. Many well-run companies obtain finance for a variety of purposes from a variety of sources. The banker whose customer has negotiated a factoring contract will at least know that:

1. The factoring house has a good opinion of his customer- it used to be said that only one out of every thirty or so companies who applied to factors were accepted, but the proportion tends to be higher now that factoring is better understood.
2. His customer’s sales ledger will be well managed and the customer will have the additional help of the factor in matters of credit information.
3. Bad debts, if any, will be eliminated and debts paid on time.
4. The covenant of the factor is being substituted for the multiple covenants of the trade debtors.
5. If required, an extra source of finance is available to aid the growth of the business, to take advantage of discount from suppliers or, conceivably, to reduce the dependence on the bank.

The customer-banker relationship and the customer-factor relationship are not mutually exclusive- indeed they are complementary. This is particularly recognized now that the clearing banks are providing factoring services alongside their traditional banking function. From the standpoint of the banking group as a whole, the debt administration and credit control services are fee-earning operations, which add strength to their customer’s businesses and extend the influence of the bank. To the extent that obtainable normally on bank overdrafts and the security is better than that which would otherwise be available to the bank on book debts.

If the roles of banker and factor are complementary, they are nevertheless different in concept. The banker lends money on the covenant and security of his customer. The factor, in so far as money may be advanced, is relying on the covenant and credit-worthiness of the client’s debtors. Given that difference, the functions are compatible and the skills are banker’s role. It is here to stay and will no doubt be the subject of considerable growth in the coming years.

FACTORING PROCEDURE BY BANKS:

Many banks in the world are now offered factoring services. In context ofBangladesh, our banks may follow the following procedures for their factoring business:

Client selection criteria

a)      The clients can be either proprietorship or partnership.

b)     They should be in the present line of business for at least 2-3 years.

c)     The customers need not necessarily be joint stock companies, provided the client has been regularly dealing with them, with satisfactory payment position. They may be located anywhere in the country.

d)     The clients may be having borrowing arrangements with any bank.

e)     The following categories of clients are not considered suitable for factoring:

–         Manufacturers of capital goods.

–         Suppliers of goods, where payment is linked to installation/ performance, etc, or where payment is made in stages/ installments.

Sanction Process

a)      Clients approach the bank office directly for preliminary discussions. If the proposal is prima-facie acceptable, the branch will write to the clients principal bank for a confidential opinion. The purpose of enquiry will be clearly stated in the letter.

b)     The clients’ factory will be visited and books of accounts- especially those related to invoices and sundry debtors – subjected to a survey. Based on the application, financial statements and survey report, a proposal is put up for sanction.

c)     On receipt of sanction, a letter will be addressed to the clients’ bank, for modification/ cancellation of post-sale limits he enjoyed and take up the matter with the bank separately. Existing liabilities under such credit facilities will however, continue with the bank, till they are realized/ repaid.

d)     On obtaining the letter of disclaimer, other legal documents will be obtained from the client.

Operational Matters

Prepayment of invoices factored by the client is made by way of factors cheque favoring the clients’ sole/ principal bank. Payee of the cheque is mentioned as: “ABC Bank a/c Client”. This will ensure that the working capital cycle is complete.

Fixing the cost

Generally a bank collects two types of charges from the clients:

v     Service charge of the invoice value, at the time of purchase of invoices.

v     Discount charge at monthly intervals, based on day-to day funds drawn position. The rate varies from client to client depending on the category and factors internal rating. The rates are more or less at par with cash credit interest rates of banks.

CHAPTER- XI: PROBLEMS AND PROSPECTS OF FACTORING IN THE BANKING SECTOR OF BANGLADESH

REASONS BEHIND THE EMERGENCE:

It is a natural feature of business that they tend to diversify into other fields. Some times diversification involves a quantum movement by companies into related fields either by developing their own operations into new areas or by acquiring existing business. Quantum diversification may or may not be successful depending on the particular circumstances of the company or companies involved. Which diversifications developed step by step into related fields without making spectacular in roads into unknown territory found most successful?

This step-by-step diversification has characterized the movement into factoring services by banking institutions, though the pace of development has varied greatly from one country to another. In some countries, for instance, it is illegal for Banks to diversify into other fields. It seems certain; however, that Banks will increasingly develop their factoring services and those restrictions on diversification will be substantially relaxed in those countries where they still form a significant barrier.

Over the years, the Banking services are breaking into the multidimensional aspects and the customers around the world are seeking the optimal services facilities associated with the cost of banking services which are being absorbed by those customers.

Time has come for banker to commit themselves to developmental banking required by the customers. In such a situation, factoring attractive because of things like increased cash flow, savings in management time elimination of worry and effort, the ability to expand sales with reliable, creditworthy customers etc the real banker regarding factoring is to disperse these attractions effectively to the existing and prospective customers.

Banks are currently undergoing sweeping changes in functions and forms. This Banking revolution happens due to Service proliferation, Rising competition in the Banking business, Deregulation, Technological revolution, Consolidation & Geographic expansion and Globalization of Banking. Banking is a business undoubtedly. No business firm can survive incurring loss continuously. Unhealthy Banks should be removed from the industry. But if Banks respond to the Public’s changing demand for new services, they need not pass away. One of the main purposes of this study is to show the importance of introducing factoring services in the banking sector ofBangladeshso that Banks can earn more profit and can survive in a proficient manner.

PROSPECTS OF FACTORING IN THE BANKING SECTOR OF BANGLADESH:

q       Banks are best suited for starting factoring activity at least to begin with. They are in excellent position to persuade customers to use their other banking facilities by seeking their factoring services.

q       There are distinct advantages in the banks being associated with handling of factoring business. Apart from the fact that they gave considerable experience in financing and collection of receivables, they also have access to credit information on both sellers and buyers; besides, their large network of branches, as also availability of sufficient financial resources, would provide additional advantages to them.

q       Introduction of export factoring services inBangladeshwould provide an additional facility to exporters. With the expected growth in international trade, exporters, particularly the smaller ones, are likely to find services of export factoring attractive.

q       Exporters of certain goods like ready-made garments, frozen foods, knitwear and hosiery products, leather, tobacco & tea who are comparatively small on asset base and investment wise but large in number may find the services of export factoring quite helpful and attractive.

q       Among the various organizations, which have been dealing with exporters, banks appear to be more eminently suitable for handling export factoring.

q       Some exporters ofBangladeshlike non-L/C terms. Even those exporters who are now able to secure L/C may find export factoring attractive, as L/Cs, being transaction oriented, are not ideal for repetitive transactions. Also there is growing resistance from overseas buyers to provide L/Cs.

q       Factoring for SSI units could prove to be mutually beneficial to both factor banks and SSI units and factor banks should make every effort to orient their strategy to crystallize the potential demand from this sector.

q        Factoring’s finance taken in isolation as a money-lending operation enjoys the benefit of marginally higher rates than traditional overdrafts and thus provides the banks with an opportunity of improving their margins.

q       Factoring will solve the problems in the areas of working capital, collection of book debts, management efficiency, coverage of bad debt loss, incremental sales and promotion of exports fromBangladesh. Factoring is important among various alternative-financing methods.

q       Factoring would raise good prospects for higher profits for clients through its positive impact on cost, liquidity and capital of the clients. It will provide required cash without increasing debt or diluting equity, generate mire returns than service charges paid to the factor and also improve liquidity through releasing the amount tied up in accounts receivable.

PROBLEMS OF FACTORING IN THE BANKING SECTOR OF BANGLADESH:

In some cases, the factoring clients were quite unsuitable for a factoring service. On the clients side there were instances of mismanagement or over-trading or failure to use the factor finance wisely or in some cases, downright dishonesty.

On the factors side, there was a lack of experience of factoring in this country, inadequate administration on the sales ledger side, insufficient credit information and a general inexperience in matters of credit appraisal are among those.

Factoring remains and always will be a risky business. Despite the systems of control, there is still the risk that through carelessness or fraud, invoices will be issued in respect of non­existent goods or to non-existent customers. Even the possibility of conspiracy to defraud on the part of the client company and the customer cannot be ruled out and has in fact been the cause of previous failures.

There remains the risk in ‘with recourse’ factoring of the failure of the client company or, in the more usual instance of ‘without recourse’ factoring, the failure of a major customer.

Factoring services are not quite suitable in the following categories of business:

q       Those, which are prone to frequent disputes between sellers and buyers.

q       Those selling principally of cash terms.

q       Those wherein progress payments are involved.

q       Those, which undertake job works.

Most banks ofBangladeshare now suffering from liquidity crisis. They don’t have enough funds for factoring business.

Default culture is now a burning issue inBangladesh. People take loan from banks but don’t like to repayment in due time. In such an appalling situation, the introduction of factoring services and its proper implementation is questionable.

InBangladesh, factoring is totally a new concept. There are not enough rules and regulations to introduce it and to move it smoothly.

As a new concept, bankers are not experience enough to handle factoring activities properly. That means the lack of expertise is a great problem of introducing factoring services.

Default culture increases due to our backdated laws & prolonged judiciary system that also creating barrier in implementing factoring appropriately.

Strong business environment is necessary for introducing factoring services but our business environment is not sound enough for introducing such service.

CHAPTER- XII: SUGGESTION

Suggestions:

Factoring has been newly introduced inBangladesh; and international factoring is yet to be introduced. Even the academicians and financial experts are yet to discuss the subject formally. Except in the recent past a few studies has suggested factoring services to facilitate the economic growth and financial discipline in the country.

Recommendations relevant to the field of this new financial service are summarized in this chapter:

• In the beginning only selected promoter institutions/ banks with good track record offering financial services and competent management should be permitted to enter into this new field. The smaller banks may be persuaded to join the bigger ones to start jointly this activity.
• At present, Bangladeshi law does not comprehensively deal with various aspects involved in factoring business. So, it would be necessary to promote special legislation to support efficient operations of factoring services inBangladesh.
• As an efficient financial system, factoring service can sustain itself on a viable basis only if a conducive environment is created and fostered, expeditious steps may be taken by Government to promote legislation, as also to grant appropriate exemptions from and make amendments to the existing laws, to serve the objectives of promoting factoring.
• A comprehensive legal framework should be developed encompassing the

Various aspects of factoring to define the rights, duties and obligations of

various parties involved in such transactions.

• Legal framework should be made available whereby invoices involved in factoring transactions should be treated at par with bills of exchange and the factoring agreement treated as irrefutable evidence in the court.
• Strength of the management, nature of the product and strength of the customers should also be given due weightage.
• Bangladesh Bank should monitor the performance of the factor banks in terms of capital adequacy, extent of raising public deposits, etc. It should be ensured that the funds raised by factor banks are not used for purposes other than factoring activities.
• With a view to attaining a balance dispersal of risks, banks should offer their factoring services to all industries and all sectors in the economy.
• Factoring activities could perhaps be taken up by the BASIC BANK as it has considerable expertise in financing and managing of SSI sector and MSI sector.
• Introduction of export factoring inBangladeshwill certainly provide an additional window of facility to the exporters; as factors will need uniform rules to operate in the international market.
• Pricing of factoring services should be reasonable. Banks should keep the cost of funds (of factoring) as low as possible so that clients will prefer this kinds of service.
• Factoring being an entirely new concept, the business community should first be educated about the nature and scope of these services and the benefits accruing there from. In this regard it perceives that the branches of banks would serve as a useful medium for extensive dissemination of information.
• The factoring bank must follow the principle of simplification of the rules and procedures to reduce the paper work and consequent delay in giving sanction.
• Continuous credit rating of the buyers & sellers and proper information have a great importance for the viability and profitability of factoring business
• A uniform accounting system is required for factoring services inBangladesh. In this regard, Bangladesh bank should initiate suitable action and issue guidelines with the help of professional accountants bodies like the Institute of Chartered Accountants of Bangladesh (ICAB), and theInstituteofCostand Management Accountants of Bangladesh (ICMAB).
• Factoring banks should have some support from guarantee/ refinance organizations to bridge their funds position.

CONCLUSION

The banking business has witnessed a sharp change in their character and composition in nineties due to a number of reformative measures and growing demand of a variety of customer services. In this backdrop, the attention of the bank management is no longer, concentrated only to the traditional banking business viz. Accepting deposits and making loans rather to the provision of a number of ancillary services (specially factoring) bringing them risk less / less risky fee income to sustain profitability. It is now being increasingly realized that the greater dependence on interests income (loans) should not be the prescription for the banks to ensure profitability due to uncertainty in the repayment behavior of Loans. In the couple of years, the dF lining trend in profitability of banks upholds this contention. The bank management inBangladesh, to day, like any other developing countries is facing two-facet challenges to improve their profitability on the one hand and to serve the customers in new ways with greater efficiency and effectiveness on the other hand. In a move to meet that challenge, the banks need to introduce innovativeness and creativity in designing the demand based service mix in order to enable the acceleration of fee income. In the coming years, factoring services will become important as major contributors to bank revenue. This is because the new service technology will not only liberate banking services from the traditional delivery systems, it will inevitably result in much narrower margins in deposit taking and lending. Thus bank decisions about the introducing of factoring services will hold the key to the improvement of profitability of banks in future.

Modern factoring involves a continuing arrangement under which a financing institution assumes the credit and collection functions for its client, purchases his receivables – they arise (with or without recourse to him for credit losses, i.e., customer’s financial inability to pay), maintains the sales ledger, attended to other book keeping duties relating to such accounts receivables and performs other auxiliary functions.

Bangladeshis yet to introduce factoring services but it should not remain a silent spectator to the events happening around and the economic scenario in which she is placed.

This paper showed various prospects of factoring services and some recommendations, which might be taken by the banks to improve their factoring services. Taking all the relevant aspects into account, there are sufficient reasons for considering factoring services to be of much importance in the banking sector ofBangladeshfor re-engineering the financial services in order to compete and survive in the modern and much competitive banking industry.

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