New Opportunities - How banks and financial institutions should adapt to changes in appetite for risk and what this means for their factoring subsidiaries.
Banks’ risk departments are more keen to get loans collateralised. This of course is good news for receivables finance as risk departments see this as an excellent risk mitigator. And this push towards receivables finance is supported by pressure from outside the banks. For example, in Holland the finance ministry and others who see themselves as stakeholders in the success of SMEs are taking a keen interest in receivables finance whilst CEOs of businesses in structured finance and leveraged deals are looking to see an asset based lending product to be included as part of the deal.
We learned a lot during the recession to help us to prove ourselves to our shareholders
- The recession gave our industry a great opportunity to do a real life stress test on our clients and it enabled us to adapt and change our procedures and structures to accommodate the changes. And it sharpened the minds of managers and staff who learned a lot in a relatively short space of time.
- Management of risk had to be done in an environment where credit insurers slashed limits and did not treat their customers, including factors as partners.
- During and post recession the number of clients in recovery increased but bad debts were controlled, thus proving the validity of invoice finance as a secure financial product.
At the same time and probably the first time, there was an increase in the cost of money arising out of the increased cost of liquidity. We had to adapt to this and we did so successfully.
But against this recognition by banks that factoring is less risky than other forms of lending are we suffering because banks are now generally more risk averse? Triggered by regulation and internal rules on credit risk there is now pressure on risk management from both inside financial institutions and from outside. Banks would probably like all their lending to be to investment grade businesses and it is not a natural thing to suggest that funding to poorer rated businesses should increase at this present time.
In reality the biggest influence on the growth or otherwise of factoring will come from the internal measure of how much money can be made on risk weighted assets used in factoring compared with other products. If factoring produces a better return than other products banks will channel lending that way and if not they won’t. So now most financial institutions have to face internal competition for funding as well as external competition in doing deals. But although it is by no means clear what Basle III will throw up, it does seem apparent that banks will be in a position to need less capital for products in a collateral based business such as factoring.
So where are we now as an industry? My philosophy is that we should take the opportunity for creativity. Factors should no longer adopt a defensive position. We are no longer lenders of the last resort but instead we are lenders for new opportunities. We shouldn’t be telling people where we have been as an industry but where we are going.
To our banks and shareholders we have proven ourselves through recoveries during the financial crisis and so they are prepared to push their customers towards our less risky product.
To potential clients we should be saying “Don’t be prejudiced by fixed ideas about costs and image. Stop looking at the expense but at the value you can get to your core business from the availability of cash. Don’t miss out on new opportunities”.
Jan Berent Heukensfeldt Jansen is CEO of IFN Finance B.V. and is Chairman of the Factoring and Asset Based Finance Association of the Netherlands. He will be speaking on Key post crisis receivables finance trends: current industry trends, observations and concerns at the BCR Conference in Amsterdam between 22nd and 23rd March.
To see the full updated programme (pdf) please click here.
Please go to RFIX site for more information and to register.
Source: Factorscan BCR