NBFC

Specific Directions Applicable To NBFC-Factors

Non-Banking Financial Companies–Factor (NBFC-Factor_ in India are subject to specific regulations and directives issued by the Reserve Bank of India (RBI), which regulates them. These guidelines are meant to guarantee the NBFC-Factors’ efficient operation, stability, and prudential management. NBFC-Factor must register with the RBI as an NBFC and satisfy the regulator’s requirements for eligibility. This blog will discuss the special directions applicable to NBFC-Factor.

Factoring

According to the Factoring Act of 2011, “the business of acquisition of receivables of assignor by accepting assignment of such receivables or financing, whether by way of making advances or loan or in any other manner against the security interest over any receivables” is what is meant by “Factoring Business”. However, the definition of a factoring business expressly excludes credit facilities offered by banks in the regular course of business against the security of receivables, as well as any activity carried out as a commission agent or otherwise for the sale of agricultural products or goods of any kind. The Factoring Act established the fundamental legal basis for factoring in India.

NBFC-Factor

The term “NBFC-Factor” refers to a non banking financial company that satisfies the principal business criteria that it has Net Owned Funds of Rs. 5 crores, financial assets in the factoring business that accounts for at least 75% of its total assets, and income from the factoring business accounts for at least 75% of its gross income. It has also been granted a certificate of registration by the RBI under section 3 of the Factoring Regulation Act, 2011.

NBFC-Factor’s entry point requirements:

• A minimum (NOF) Net Owned Fund of Rs. 5 crores is required of any firm seeking registration as an NBFC-Factor under the Companies Act 1956. 
• Existing businesses that want to be registered as NBFC-Factors but do not meet the NOF criteria of Rs. 5 crores may ask the Bank for more time to meet the requirement.

Registration of NBFC-Factor

(1) Any company wishing to engage in the factoring business must submit an application to the Bank for approval as an NBFC-Factor under Section 3 of the Factoring Regulation Act, 2011, and must also follow the PBC (Principal Business Criteria) requirements outlined in Direction. 

(2) Any non-systemically important NBFC-ICC (Investment and Credit Company) that already exists and plans to engage in factoring activity must apply to the Bank to become an NBFC-Factor. These NBFC-ICCs must adhere to the principal business criteria requirements.

(3) The original CoR that the Bank provided to the NBFC-ICC in accordance with section 45-IA of the RBI Act, 1934,¹ must be surrendered along with the application for the conversion, along with any supporting documentation intended for fresh registration as an NBFC-Factor.

(4) An entity mentioned in section 5 of the Factoring Regulation Act, 2011, i.e., a bank or a body corporate established under an Act of Parliament or State Legislature, or a Government Company, may conduct the business of factoring even though it has not registered with the Bank under the Act; 

(5) Within six months following the certificate of registration issuance, NBFC-Factor must start operating as a factor. 

Net Owned Fund – Every business that applies to become an NBFC-Factor must have a minimum Net Owned Fund of $5 crore or as otherwise determined by the Bank. 

Principal Business – The main activity An NBFC-Factor must ensure that its financial assets in the business of factoring account for at least 50 per cent of its total assets and that the percentage of its gross income from the factoring business is at least 50 per cent. 

Business Conduct And Prudential Requirements – NBFC-Factors must conduct their factoring operations in accordance with the Factoring Regulation Act of 2011 and the rules and regulations outlined therein, as well as any other instructions or policies that may be issued from time to time by the Reserve Bank.

Asset Classification 

In addition to the prudential norms, an NBFC-Factor must treat as a non-performing asset (NPA) any receivable acquired through factoring that is not paid within six months of the applicable due date, regardless of when the factor first acquired the receivable or whether the factoring was done “with recourse” or “without-recourse” basis. The company on which the exposure was recorded must be indicated as an NPA, and provisioning must be made as necessary. 

Exposure standards must be calculated as follows: 

1. When factoring on a “with-recourse” basis, the exposure shall be reckoned on the assignor.
2. With the exception of international factoring, where the import factor has assumed the complete credit risk, exposure in cases of factoring on a “without-recourse” basis shall be attributed to the debtor, regardless of the credit risk cover or protection offered.

Risk Management 

Before an NBFC-Factor engages in factoring activity, proper and sufficient control and reporting procedures must be in place. 

1. Before establishing any factoring agreements or lines of credit with the export factor, NBFC-Factors must conduct a complete credit analysis of the debtors. 
2. Factoring services must be provided for invoices that represent actual business transactions. 
3. Since the NBFC-Factor assumes the credit risk associated with the debtor in “without recourse” factoring transactions, there must be a limit that has been established and agreed upon by the board for all such underwriting commitments. 
4. d. Information on common debtors will be shared between NBFC-Factors and banks. The assignor will be considered the borrower for information-sharing.To prevent double financing, NBFC-Factors must make sure to inform the involved banks and NBFCs of the borrower’s credit restrictions and the specifics of the debts they have factored in.

Export/ Import Factoring 

NBFC-Factors are authorised by the Reserve Bank’s Foreign Exchange Department (FED) in accordance with FEMA, 1999. Suppose an NBFC-Factor intends to transact in foreign exchange through export/import factoring. In that case, it must apply to the foreign exchange department for the necessary authority under the FEMA, 1999, and abide by all applicable FEMA provisions as well as any rules, regulations, notifications, directions, or orders issued thereunder from time to time.

Certain Things Do Not Apply When It Comes To Factoring:

• Account deposits
• Foreign Exchange transactions, as long as they don’t involve foreign currency receivables
• Issued LOC/Guarantee
• Possibly a takeover, merger, or amalgamation of the business
• Restructuring the business
• Personal use sales of goods or services
• Receivables from loans that one Bank or NBFC assigns to another bank or NBFC Factoring
• Settlement of transactions between commodity or stock exchanges
• Settlement of transactions under Netting Contracts
• Securitisation transactions under the SARFAESI Act 
• Settlement of interbank payments and their underlying systems.

Conclusion

NBFC-Factors must keep records and submit reports on a regular basis to the RBI and other authorities. These reports may cover financial statements, adequate capital, a factoring portfolio, and regulatory compliance. NBFC-Factors must maintain a balance between innovation, risk management, and regulatory compliance as they continue contributing to the financial ecosystem. By doing this, they can continue to help in the development of the economy.

FAQ: –

Read Our Article: NBFC Factoring: What is Factoring and Process of Factoring

1. https://en.wikipedia.org/wiki/Reserve_Bank_of_India_Act,_1934