NBFC

Factoring Regulation (Amendment) Bill 2021: Drawing 9000 NBFCs

The parliament recently passed the Factoring Regulation (Amendment) Bill 2021 to provide relief to the MSME sector and help them to ensure a smooth capital cycle and healthier cash flow. The Bill is expected to enable close to 9000 NBFCs to participate in the factoring market, thereby boosting cash flow to small businesses. The bill was passed in the Rajya Sabha on 30^th July 2021.

Factoring Business

It refers to a business where an entity acquires the receivables of another entity for an amount. It is worth mentioning here that credit facilities provided by a bank against the security of receivables are not termed as factoring business.

Factor may be bank or a registered NBFC or any company registered under the Companies Act. Receivables refer to the total amount owed or which is not paid yet by the customers to the assignor for using any goods, services or facility.

Key provisions of the Factoring Regulation (Amendment) Bill 2021

In this segment, we shall discuss the key provisions of the Factoring Regulation (Amendment) Bill 2021.

• Change in Definition

The bill amends the definitions of the receivables, assignment and factoring business to bring them at par with the international definitions.

• NBFC Factoring Threshold Relaxation

The bill amends the Factoring Regulation Act 2011 with a view to widen the scope of the entities which can engage in factoring business. The present law gave the RBI the authority to permit NBFCs to remain in factoring business only if it were their principal business- i.e., more than half of assets to be deployed and income earned from the factoring business. The bill has removed this threshold and provides the opportunity in this business to more non-bank lenders at a time when small businesses are facing financial stress.

• Trade Receivables Discounting System to register charges

Trade Receivables Discounting System (TReDS)^[1] is a digital platform that facilitates financing of trade receivables of MSMEs. The bill specifies that if trade receivables are financed through the Trade Receivables Discounting System, the details about transactions has to be filed with Central Registry by the concerned TreDS on behalf of the factor.

• RBI to regulate

It has empowered RBI to make regulations to grant registration certificate to a factor, filing of transaction details with the Central Registry and all other matters.

• No time bound Registration

It also removed 30 day time period for the factors to register details of every transaction entered by them. The registering authority for the transactions is the Central registry that is set up under the SARFAESI Act 2002.

What is the significance of the Factoring Regulation (Amendment) Bill?

Its significance can be determined from the following:

• Permitting non-NBFC factors and other entities to undertake factoring may increase the supply of funds available to small businesses. It can cause to reduce the cost of funds and enable greater access to the credit lacking small businesses and also help them with timely payments against receivables.
• MSMEs face challenges with regard to delay in receivables, and this bill would assist smoother working capital cycle and healthy cash flow. MSMEs would get easier liquidity which shall help in their operation.
• It is expected to liberalize the restrictive provisions of the Act and also ensure that a strong regulatory oversight mechanism is placed through the reserve Bank.

Finance Minister Nirmala Sitharaman said that a number of MSMEs stands to directly benefit by this move. She further said that even as the economy revives, for MSMEs to have great access to liquidity and working capital and have the chance to sell their receivables to a third party in exchange for cash would make a significant difference. Basically, this bill will allow all NBFCs to engage in factoring business.

Despite notable growth in the last few years, the factoring market only accounts for 0.2% of India’s GDP, which is terribly low as compared to some developing economies such as Brazil and China. The worldwide factoring market is expected to reach 9.2 trillion dollar by 2025.

The house panel stressed the requirement for the Reserve Bank to build enough regulatory resources to ensure adequate supervision of factoring activities as a huge number of players might take part in the businesses with the implementation of the new norms.

Conclusion

The Factoring Regulation (Amendment) Bill incorporated many suggestions from the UK Sinha Committee, and later on, the bill was announced in September 2020 and then referred to standing committee of the House.

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