Lok Sabha passes Factoring Regulation (Amendment) Bill 2020

The Lok Sabha on Monday passed the Factoring Regulation (Amendment) Bill 2020 that seeks to widen the scope of entities that can engage in factoring business. The Bill will pave the way for non-NBFC factors and other entities to undertake factoring activities.

Moving the Bill for passage in the lower house, Finance Minister Nirmala Sitharaman said that government has accepted all the recommendations of the Standing Committee of Finance, which had submitted its report on February 3 this year.

Eight changes

She said that the Standing Committee had recommended about eight changes, including one legislative change and all have been accepted by the government.

It maybe recalled that the Factoring Regulation (amendment) Bill 2020 was introduced in the Lok Sabha in September last year and the purpose of the proposed amendments was to liberalise the restrictive provisions in the Act and at the same time ensure that a strong regulatory/oversight mechanism is in place through the Reserve Bank of India.

Factoring is a transaction where an entity (like MSMEs) ‘sells’ it’s receivables ( dues from a customer) to a third party ( a ‘factor’ like a bank or NBFC) for immediate funds (partial or full). Currently, seven non-bank finance companies called NBFC factors do the majority of the factoring through the principal business condition. These are Canbank Factors, India Factoring and Finance, SBI Global Factors, Siemens Factoring, Bibby Financial Services, IFCI Factors and Pinnacle Capital Solutions.

Finance panel recommendations

The Standing Committee on Finance headed by Jayant Sinha had recommended the integration of Trade Receivables Discounting System (TReDS) with GSTN e-invoicing portal leading to automatic uploading of all GST invoices on to the TReDS platform to enable real-time sharing of data that will allow buyers and sellers to have a single window access to invoices.

This panel had also recommended that receivables coming from the Central and state governments should compulsorily be brought under the ambit of TReDS through this legislation so that payments pending from the governments, which have already been approved for various MSMEs, are made available to them on a timely basis.

The standing committee has also recommended that credit insurance be extended for domestic factoring to provide additional protection to the factor and further encourage and promote the factoring companies to lend to more aggressively to MSMEs. Also, factoring company should be granted status of specialised MSME funding entity so that a major portion of their corpus is earmarked for the benefit of MSMEs. To encourage growth of factoring business, the standing committee had also stressed the need to have a credit rating mechanism for receivables and suggested that commercial banks be encouraged to provide a wholesome financing for Factors.

Industry view

Reacting to the Lok Sabha passing the Factoring Bill, Ram Iyer, Founder & CEO, Vayana Network, a trade finance platform, told BusinessLine that allowing non-NBFC factors and other entities to undertake factoring is expected to increase the supply of funds available to small businesses. This may result in bringing down the cost of funds and enable greater access to the credit-starved small businesses, ensuring timely payments against their receivables, he said.

Furthermore, recommendations of the Standing committee are expected to increase the traction of TReDS platforms. Steps like integration with GSTN, mandatory listing of the government dues and direct filing of charges will improve the operational efficiency and acceptability of the platforms among the financiers.

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