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Boost to MSME cash flow: Lok Sabha may take up factoring Bill today

The new Bill seeks to allow all non-banking financial companies (NBFCs), instead of a select few, to engage in factoring business – a move that could help improve the cash flow to Covid-hit micro, small and medium businesses (MSMEs).

Mature factoring markets, more specifically Europe, continue to dominate the factoring market, accounting for 68% of global factoring. The factoring market worldwide is projected to reach $9.2 trillion by 2025.

The proposed amendments to the factoring law, which seek to widen the participation of financiers in factoring business, relax restrictive provisions and empower the central bank to bolster norms for better oversight of the $6-billion market, could be taken up for approval in the Lok Sabha on Tuesday.

Finance minister Nirmala Sitharaman was earlier scheduled to move the Factoring Regulation (Amendment) Bill, 2020, for clearance by the Lok Sabha on Monday. But the lower House was adjourned early on Monday, as its proceedings were frequently disrupted by Opposition parties.

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The new Bill seeks to allow all non-banking financial companies (NBFCs), instead of a select few, to engage in factoring business – a move that could help improve the cash flow to Covid-hit micro, small and medium businesses (MSMEs).

Factoring is essentially a transaction where an entity (like MSME) sells its receivables (dues from a customer) to a third party (a ‘factor’ like a bank or NBFC) for immediate funds. It often helps a firm satiate its immediate working capital requirement.

Under the extant law, to engage in regular factoring business, an NBFC’s financial assets in the factoring business and income from it should both be more than 50% of its gross assets and net income or greater than a threshold, as notified by the Reserve Bank of India (RBI). The new Bill removes this threshold, making it easier for NBFCs to engage in factoring business. Many MSMEs, whose payments against supplies are stuck, participate in the factoring business with receivables.

Despite growth in recent years, the factoring market accounts for only 0.2% of India’s GDP, way behind comparable developing economies such as Brazil (4.1%) and China (3.2%), according to a report of the parliamentary standing committee on finance, which reviewed the Bill and endorsed the amendments.

Mature factoring markets, more specifically Europe, continue to dominate the factoring market, accounting for 68% of global factoring. The factoring market worldwide is projected to reach $9.2 trillion by 2025.

In India, the factoring credit makes up for only 2.6% of total formal MSME loans in India, way below 11.2% in China. Moreover, only 10% of the total receivable market is currently covered under formal bill discounting mechanism, while the rest under conventional cash, credit/overdraft arrangements with banks. As one of the principal instruments of working capital and trade finance, bill discounting and factoring remains underutilised.

The factoring Bill will empower the RBI to make regulations in respect of matters relating to the manner of granting certificate of registration, filing of particulars of transactions with the Central Registry on behalf of factors; and any other matter that is required to be specified by regulations.

It also seeks to amend the definitions of “assignment”, “factoring business” and “receivables”, to bring them in sync with international definitions and also to insert a new definition of “Trade Receivables Discounting System”.

The Factoring Regulation (Amendment) Bill, 2020, was introduced in the Lok Sabha by finance minister Nirmala Sitharaman on September 14 last year. Later that month, the Lok Sabha speaker referred the Bill to the Parliamentary standing committee for examination.

The panel, in its report submitted in February, stressed the need for the RBI to build sufficient regulatory resources to ensure effective supervision of factoring activities now that a large number of players may take part in such businesses with the implementation of the new norms.

Factoring activities in India include invoice discounting, recourse and non-recourse factoring, collections and reverse factoring. However, international factoring includes a much wider spectrum of activities like export factoring, import factoring, export invoice discounting and reverse factoring.