Will Factoring in Russia continue its rapid growth? (интервью гендиректора ВТБ Факторинг (eng)).

Mikhail, where is the Russian factoring industry and what do you see happening over the next few years?

Russia experienced a huge growth in factored turnover in 2011. However, unlike in Turkey, where last year there was a big reduction in factored turnover merely because one big company stopped using factoring, we won’t see a similar reduction in Russia in 2012. VTB Group where we have 27% of the market and with no single client of more than 5% is typical of the spread within Russian factors. So our position is very different.

Traditionally, factors in Russia have grown through FMCG – wholesalers, electronics, food etc. And last year although new business from this area probably doubled, additional business came from factoring being taken up in new industries such as oil, gas, metallurgy and automotive.

These aren’t typical areas for factors. Is this because these industries are so strong in Russia?

Yes. If you look at the GDP of Russia these sectors take up a huge chunk and so they have to be a natural target for all factoring companies. If not, they will miss out on a substantial part of the market. Russia lags behind the rest of Europe in terms of percentage of GDP factored and we need to increase that percentage by working with new industries. We also need to be innovative in developing products for these markets.

And are you seeing a shift towards bigger companies using factoring?

Today half of factoring sales comes from large corporates. Years ago factoring was used primarily by smaller business. The reason for this was that large corporates were often not aware of the existence and the specific qualities of factoring. In addition, interest rates on factoring were formerly too high to be attractive for large business. Now the situation has changed. Factoring has started enjoying a greater popularity in the business community, interest rates have become better and so we see large corporates getting interested in factoring as an effective financial instrument.

Which types of product are used by these large corporates?

We have had to adapt and construct tailor made products. It could take a significant amount of time to negotiate contract terms and end up with the finished product. But once that product is approved by one company in a particular industry we can then have similar discussions with other large corporates in the same industry. So it’s more about suiting the product to meet the client need, e.g. in the metallurgical industry, which can have staged payments and particular requirements on notice for changing of credit limits.

Is it VTB only or are other Russian Factors developing products and moving into large corporates?

I believe others are doing it too. FMCG is so competitive – almost all market players compete in this sector. So margins are decreasing and everyone is looking for diversification in terms of industry and location.
 

Is there a move towards Asset Based Lending?

We observe a demand for this product in the market, but there should be the right infrastructure to meet that need. First of all, regulation and the legal framework should be optimized.

In three years time what will the industry look like?

I expect that we will continue to enjoy a really good growth rate of maybe 40% a year. GDP penetration is after all only 1.6% and this is quite low compared to European benchmarks. In the next few years the penetration of factoring in Russian GDP will increase mostly through large corporates. That means that our profile will be different from the rest of Europe which concentrates on SMEs. There aren’t many SMEs in Russia and you can’t sell a product to companies that don’t exist.

So even if there are low margins on a deal for a large corporate your return is still better than on a small deal.

And will there be more complete national coverage in such a huge country?

Although 70% of business is centred in Moscow and St. Petersburg, industries are all located in the regions, and so movement into new industries organically causes movement into the regions. So we will see an increase in regional factoring but dealing with large corporates through their headquarters in Moscow.

So, expansion into Gas, oil, metallurgy – is this the future for the Russian factoring industry?

There are a number of factors influencing the movement into these industries which makes it hard to predict what is going to happen. These areas are new to the factoring business, so we have a period where we will test how it works and whether both, factor and client like the product

And what of VTB Factoring?

VTB Factoring will fund a wide range of different industries, with increased regional coverage in both Russia and CIS countries. Compared to other Russian factors, VTB Factoring has more opportunities to work outside Russia, through VTB subsidiary banks in Europe Africa and Asia.

Source: AFK