In 2004-05 (April/March), Global Trade Finance (GTF) posted a phenomenal growth of 340 percent in net profits and 136 percent in business turnover. What factors contributed to this extraordinary growth?
April 04-March 05 saw GTF grow at a fast pace in terms of assets, turnover and profits. The year represented the third full year of GTF's operations. There was a change in the shareholding with Exim Bank, India becoming the largest shareholder instead of the earlier West LB and FIM Bank. Malta, having extensive trade finance expertise and international presence became a new shareholder. Both major shareholders extended unstinted support and shared expertise. The year also saw a change in management and product mix. A clearly defined business strategy, underpinned by high levels of customer relationship and responsiveness were the key determinants driving the pace of growth. Above all, factoring as a product moved into an “acceptance” mode from the “novelty” mode in India bringing this country on par with the finance products available in developed countries as in Japan, Europe and North America.
International or Export Factoring, the core product of GTF, continued to grow during 2004-05, despite higher cost of funds. Fuelled by the buoyant exports scenario in the country, the Company’s Export Factoring turnover grew from Rs.4,367 million in 2003-04 to Rs. 6,432 million in 2004-05, a growth of 47 percent in absolute terms. In order to provide a responsive and rounded service to its clients, GTF undertook finance of a few cross border transactions under D/P and LC terms.


Thus, overall the company has booked business aggressively by locating opportunities and offering a greater value-add to its clients. During the year, GTF received approval from RBI to offer pre-shipment finance in Rupees to its clients. It also added Channel Financing for domestic sales with credit protection to its menu of product offerings. Moreover, in December 2004, GTF relocated its Chennai office, to new premises at a prime location. The new location has an advantage of easy accessibility to the prime business center in the metropolis.

The year 2005-06 will be coming to close in the next two months. Will GTF repeat or exceed its previous year's performance?
At the end of three full years of operations, GTF occupies a unique position as a major player in trade finance in India. The company's objective is to offer trade finance solutions to its clients, in a simple manner that go beyond banking. Since March 31, 2002, the company has shown a consistent increase in its turnover and profit after tax, (see graph):-
Keeping the above trend in mind, the company has budgeted for an estimated turnover of Rs. 30,000 million for FY 2005-06. This includes Rs. 9,000 million for Export Factoring and Rs. 21,000 million for Domestic Factoring.
The company has been quite aggressive during the year in order to meet its target and has expanded its operations in the coming fiscals by targeting major geographical trade centers of the country. The industry verticals that have continued to remain focus areas are Pharmaceuticals, Chemicals, Automative components, Textiles and Engineering goods. Newer products in response to changing customer needs have been an important ingredient in GTF's growth story. Domestic Factoring without recourse, Reverse Factoring and Import Factoring are new products introduced recently.



Could you brief us on the overall global economy and the near-term forecast for 2005-06 and 2006-07 and what will be the growth projections for India's exports and imports?
The global economy has displayed remarkable buoyancy and resilience during the past couple of years. World output is estimated to have expanded by 5.1 percent during 2004, which is the highest growth achieved in the past three decades. While such high growth is unlikely to be sustained during the next two years, we expect that world output will nevertheless rise at the relatively high rate of 4.3 percent during 2005-06 (this is based on IMF analysis). We also predict that world output would continue to expand by the same rate of 4.3 percent during 2006-07. This is strong expected growth in world output during 2005-06 is remarkable considering that there has been a continuing increase in crude oil prices. This suggests that economic structures in many countries, both industrialised and developing economies, have become more flexibile because of appropriate policies and reforms. Low long term interest rates, resilient global equity markets, strong corporate profits and accomodative macroeconomic policies have all played a role in offsetting the impact of high oil prices. In particular, China and India have emerged as stellar performers with predicted growth of 9.0 percent and between 7.0 to 8.0 respectively during 2005-06.
From the viewpoint of Indian exporters, buoyant world trading conditions present a very conducive environment for expanding exports. During 2004, world trade volume rose by a hefty 10.3 percent (reflecting a characteristic of the world economy revealed over several decades where trade growth has always far exceeded GDP growth). This represents the second highest growth in world trade since 1998. As in past years, lower expected world output growth during the next two years will inevitably affect world trade. Nevertheless, world trade volumes are expected to grow at relatively high rates of 7 percent and 7.4 percent during 2005-06 and 2006-07 respectively.
During April to December 2005, the value of Indian exports amounted to US$ 66 billion which represents an increase of 18 percent compared with the corresponding period of 2004. Going on the basis of this export performance, it is likely that exports during 2005-06 will be close to the official export target of US$ 93 billion for 2005-06. This target represents a 16 percent growth, in US dollar terms, over 2004-05. With world trade volumes likely to grow in 2006-07 at about the same pace as in 2005-06, it is predicted that the growth in Indian exports during 2006-07 would be between 15 to 20 percent.
As regards to imports, going on the basis of trends during April to December 2005, the value of imports in US$ terms during 2005-06 are likely to grow by about 20 percent compared with the previous year. With moderation in the rise of oil prices, import growth may come down to about 15 percent in 2006-07.



What is your perception of the global oil prices scenario, with focus on India, one of the largest importers of oil?
There are two important ways in which rising oil prices affect the Indian trade sector. The direct impact is through the rising costs of oil imports, which are a major component of India's import basket. The more indirect consequence is through the effect of rising oil prices on global economic growth and trade, which in turn affects India's export growth.
We shall consider the indirect impact first, since it has not attracted enough attention in India. From India's viewpoint, it is a relief to find that rising oil prices during the past year have only had a modest effect on global economic growth. Although, forecast global economic growth for 2005-06 is only a little less than the high growth recorded in 2004, there are several reasons for the relatively limited impact of oil price increases on global economic growth, compared with earlier episodes, especially the experience of the 1970s. One is the structural decline in the oil intensity of the global economy over the years. Another key reason is that the principal factors responsible for recent oil price increases have been robust demand for oil and expectations of future shortfalls in oil capacity rather than the occurrence of a major disruption in oil supply (though there has been a shortfall in non-OPEC supplies). Hence, global oil consumption has continued to keep pace with the needs for economic growth.
It is expected that oil prices may continue to remain at high levels during 2006. However, because of the relatively limited impact on the global economy and world trade, it is likely that the trading environment for Indian exporters will continue to be buoyant.
However, as regards to the impact on India's oil imports, there has been a sharp rise in the oil bill. The value of oil imports during Apr-Dec 2005 rose by as much as 45 percent compared with the corresponding period of 2004 (in comparison, non-oil imports rose by only 20 percent). Oil accounts for a major share of India's import basket (during 2004-05, the share of oil was 27 percent). Hence, the increased cost of oil imports has been a major factor in the widening of the trade deficit, which rose sharply by 54 percent during Apr-Dec 2005, compared with Apr-Dec 2004. Continued efforts to enhance domestic oil production capacity and diversify energy sources will reduce the dependence on imported oil. However, this is likely to be a slow process. In the near term, high export growth both of goods and services and continued large inflows of foreign capital (both foreign direct investment and portfolio capital) are likely to offset the impact of the rising oil prices on India's balance of payments. This is evidenced by the fact that India's balance of payments position continued to remain comfortable in 2005 with foreign exchange reserves rising by about US$ 1.7 billion between March and October 2005.

What are the short-term projections for the factoring sector against the backdrop of the fluctuations in interest rates?
The factoring sector can be positively and negatively affected due to interest rate fluctuations. In the advent of rising interest rates, factoring companies tend to face pressure on their margins. In such a situation, banks, with a limited need to borrow funds, tend to have an edge over and above NBFCs providing factoring as a service. Due to this, banks usually are in a position to lend at competitive rates. However, the drop in margins can be minimized by increase in the quantum of business. In a soft interest rate regime, factoring companies definitely tend to benefit. They have an option to widen the gap between borrowing and lending.
Financing is just a part of the factoring service provided by companies like GTF. There is continuous cash flow due to other services offered like credit protection, collection of receivables and follow-up and sales ledger management and analysis etc. As long as there is increased demand for money from the exporter and importer community, volumes should not deter.
Thus, the factoring sector may tend to be partially affected by interest rate fluctuations in the short run. However, with increase in quantum of business, the impact gets reduced in the long run.

Give us a brief account of the changes perceivable in the near future in global as well as local currency markets and their impact on India's exports and imports.
A remarkable feature of 2005 was the appreciation of the US dollar in relation to the currencies of other major industrialized countries. This was a reversal of trends in 2004 when the US dollar was in a weak position. The rally of the US dollar during 2005 reflects a number of factors including strong growth in the US economy, the poor economic performance of the Euro area, and interest rate differentials favouring the US. Expected growth differentials in 2006 between the US and the Euro area continue to favour the US. However, traditional concerns about the large budget and external deficits in the US, which has emerged as a chronic structural problem, will continue to affect the strength of the US dollar (the gravity of the problem is indicated by the fact that the US current account deficit in 2005 is estimated to exceed 6 percent). Hence, it would be difficult to predict the movement of the US dollar in the near future.
In tandem with the appreciation of the US dollar during 2005, the Indian rupee has depreciated against the dollar and appreciated in relation to the Euro, Pound Sterling and Japanese yen. This has boosted export earnings and raised the cost of imports. Nevertheless, the Indian trade deficit has been widening because of the increased import bill, on account of the continuing rise in oil prices. However, the overall Indian balance of payments has been comfortable because of other foreign currency receipts especially foreign capital inflows. Because of the continued attractiveness of the Indian economy for foreign investors (including both foreign direct investment and portfolio capital) and other dollar inflows, it is possible that the rupee may gently appreciate to an average of Rs. 43/ US$ and Rs. 42.5/ US$ in 2006 and 2007 respectively.

What is Global Trade Finance's specific advice to the Indian export community?
Our advice to the Indian export community is that, considering the buoyant global trading environment, this is perhaps a most opportune time for them to plan and implement an aggressive thrust into international markets. Despite some protectionist cries, there is also major liberalisation of trade in global markets, partly because of WTO initiatives. For instance, the removal of global quotas in trade in textile and clothing has meant a dramatic expansion in the opportunities for export of such products. However, the Indian export community will doubtlessly appreciate that, competition is also intense in global markets, largely because of the strong capabilities developed in many competing countries, particularly China. Hence, besides vigorous efforts to sell world class goods (or services), exporters should also place adequate emphasis on all the other factors that contribute to successful export efforts such as marketing and finance. In the area of finance, we find that many exporters are not making full use of all the financial services and mechanisms that are available to compete effectively, because of lack of knowledge or inadequate appreciation of the benefits. For instance, there is still limited use in India of export factoring, which is a core product for GTF, despite its well known advantages (especially for small and medium enterprises) which have made factoring popular in many countries. On its part, GTF, through its various financial products and services, will do its utmost to support the Indian export community to capitalize on the enormous opportunities being opened up in export markets.

Any other information that you would like us to carry regarding GTF and the export-import scenario.
International trade continues to play a growing role in economic activity and sustained development, enabling a higher standard of living and poverty alleviation. Growth of external trade in Asia is one of the key drivers of world economic growth. Export and import growth has been strong and accelerating across Asia through most of the last decade.
Ensuring adequate availability of credit to exporters and importers at competitive rates has always been an important policy consideration for the government. Given the large number of commercial banks in India and their widespread network of branches, they have constituted the main source of short term trade financing through various schemes including bill discounting, refinance facilities, issuance of guarantees etc. Despite a significant rise in export credit over the last two years, commercial banks have typically played a passive role in providing export finance. At times, when other forms of bank credit have been much more lucrative, there have even been complaints of shortage of export finance from banks for small exporters.
Favorable payment terms make exports more competitive. Exporters may need financing to produce goods or to finance other aspects of a sale such as promotion and selling costs, engineering modifications and shipping costs. Hence, exporters and importers are looking for any competitive advantage that would help them increase their sales.
Importers increasingly prefer open account terms in place of conventional credit routes. Hence, transactions on open account terms with extended dating are becoming common in spite of it being ridden with high amount of risks and dangers to the seller.
This development has been instrumental in creating a need for newer instruments of export-import finance and risk mitigation. Due importance is also being given to reduction in political economic uncertainties faced by exporters and importers. As a result, there has been popularization and adoption of alternate external trade financing mechanisms like Factoring, Forfaiting and Purchase Order Financing. These instruments along with older instruments such as Pre-shipment Financing and Post-shipment Financing, offer a distinct value added proposition to its customers, who are primarily small and medium sized exporters and importers and are unable to mitigate risks.
We at GTF are the only providers of international factoring, domestic factoring and forfaiting services under one roof in India. Our customized and highly professional solutions for receivables management, global trade financing and risk mitigation are geared to make it a smooth road for Indian exporters. That too, with minimum facility setup time and superior and world-class service. Our comprehensive package of services include:
• Export Receivables Financing with Credit Protection
• Domestic Receivables Financing with/without recourse
• Import Factoring
• Credit Protection and Management
• Collection Services and Follow-up
• Professional Sales Ledger Management and Analysis