NBFC Factoring: What is Factoring and Process of Factoring

Narendra Kumar

31 Dec, 2020

NBFC Factoring means a Non-Banking Financial Company satisfying the following Principal Business Criteria’s:

• whose financial assets in the factoring business constitute at least 75 percent of its total assets and;
• income derived from factoring business is not less than 75 percent of its gross income;
• Net Owned Funds of Rs. 5 Crore ;
• And has been granted a certificate of registration by RBI^[1] under section 3 of the NBFC – Factoring Regulation Act, 2011.
• Should be a Company registered under the Companies Act, 2013.

What is Factoring:

The Factoring Regulation Act, 2011^[1] defines the ‘Factoring Business’ as “the Business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether by way of making loans or advances or in any other manner against the security interest over any receivables”.

Exclusions:

However, credit facilities provided by banks in the ordinary course of business against the security of receivables or any other activity undertaken as a commission agent or otherwise for sale of agricultural produce or goods of any kind whatsoever and other allied related activities are expressly excluded from the definition of NBFC – Factoring Business & its operating ambit.

The Factoring Regulation Act has laid down the basic legal framework for factoring in India.

Mandation:

An entity or an organization not registered with the Bank or been given the Certificate to operate one may not conduct the business of factoring unless it is an entity mentioned in Section 5 of the Act i.e. a Bank or any Body Corporate established under an Act of Parliament or State Legislature, or a Government Company as specified under companies Act, 2013.

Functions Performed:

• Assignment of Receivables –
  

1. Any assignor may, by an agreement in writing, assign any receivable due and payable to him by any debtor, to any NBFC – Factoring, being the assignee, for a consideration as may be agreed between the assignor and the assignee and the assignor shall at the time of such assignment, disclose to the assignee any defenses and right of set-off that may be available to the debtor in question.

Provided that if the debtor is liable to pay the receivable or the business of NBFC – Factoring is situated or established outside India, any assignment of receivable shall be subject to the provisions of the Foreign Exchange Management Act, 1999 (42 of 1999) & FDI Rules framed in this behalf.

1. On execution of agreement in writing for assignment of receivables, all the rights, remedies and any security interest created over any property exclusively to secure the due payment of receivable shall vest in the assignee and the assignee shall have an absolute right to recover such receivable and exercise all the rights and remedies of the assignor whether by way of damages or otherwise, or whether notice of assignment as provided in section 8 is given or not.
2. Any assignment of receivables which constitute security for repayment of any loan advanced by any Bank or other creditor and if the assignor has given notice of such encumbrance to the assignee, then on accepting assignment of such receivable, the assignee shall pay the consideration for such assignment to the Bank or the creditor, as the case may be.

• Discharge of Such Obligation –
  

Any assignee of a receivable shall not be entitled to demand payment of the receivable from the debtor in respect of such receivables unless & until a notice of such assignment is given to the debtor by the assignor or the assignee along with express authority in its favors granted by the assignor.

• Payment to Assignee –
  

Where a notice of assignment of receivable is given by the assignor or the assignee, as the case may be, the debtor on receipt of such notice, shall make payment to the assignee and payment made to such assignee, discharge of any obligation in relation to the receivables specified in the notice shall fully discharge the debtor making the payment, from corresponding liability in respect of such payment.

Certain things do not apply when it comes to Factoring:

• Bank Deposits
• Foreign Exchange transactions provided that they are not receivables in foreign currency
• LOC / Guarantee issued
• Some sort of merger, amalgamation or takeover of the company
• Restructuring of business
• Sale of goods or services for personal use
• Assignment of loan receivables by a bank/NBFC to another bank/NBFC – Factoring
• Transaction settlement between Stock Exchanges or Commodity Exchanges
• Transactional settlement under Netting Contracts
• Inter-Bank Payment settlement & the underlying systems
• Securitization transactions under SARFAESI Act.

Types of Factoring:

1. Recourse Factoring
2. Non-Recourse Factoring
3. Advance Factoring
4. Maturity Factoring
5. Full Factoring
6. Domestic & Cross-Border Factoring
7. Disclosed & Undisclosed Factoring

Functions of a Factor:

• Financing & funding benefit
• credit protection & risk avoidance
• Maintenance of database & other ledger formats
• Enhancing liquidity
• Disbursal of money & quick settlement of transactions.

Henceforth, factoring forms a significant part of a business, especially those businesses which are giant in size& have larger infrastructure covered. If used wisely and to the benefit of the company, it can help the business outperform on a financial forum.