Factoring: New Regulations Bring A Revolutionary Change in MSME’s Business

What are the advantages of the Indian Factoring Regulation Act?

When financial institutions like NBFCs are ready to take on the risk of collecting pending receivables, it gives MSME business owners more options. Many MSME owners, for example, may be unwilling to wait for payments and may be eager to sell their receivables at a discount. Furthermore, the risk of collecting receivables can deter many risk-averse people from entering the MSME area. Increased availability of factoring services may thus make it easier for new businesses to enter the market.

MSMEs currently have access to overdraft facilities provided by banks, with their receivables serving as security on occasion. Banks, on the other hand, can hold overdraft borrowers liable if a receivable supplied as collateral proves to be noncollectable. In the case of factoring, however, the NBFC or bank takes on the whole risk of collecting the receivables.

What awaits us?

While the new regulation may increase the likelihood of MSMEs having better access to factoring services, its success is far from certain. India’s weak judicial system, which is plagued by excessive delays and corruption, is likely to be the main issue. Under the current structure, even major creditors have a difficult time recovering their losses. As a result, NBFCs may find it difficult to recover noncollectable accounts through legal means. As a result, their desire to invest in the factoring industry may be impacted.

• The Factoring Regulation (Amendment) Bill, 2020 was introduced in the Lok Sabha on September 14, 2020. The bill aims to broaden the spectrum of businesses that can engage in factoring operations by amending the Factoring Regulation Act of 2011.
• The Factoring Regulation Act of 2011 defines factoring as a business in which one entity (referred to as the factor) purchases the receivables of another entity (referred to as the assignor) for a fee. The total amount owing or yet to be paid by customers (referred to as debtors) to the assignor for the use of any products, services, or facility is referred to as receivables. A bank, a registered non-banking financial company, or any other corporation registered under the Companies Act can all be factors. It’s worth noting that a bank’s credit facilities are secured by the bank’s assets.
• Changes to the concept of receivables: The Act defines receivables as the monetary sum that represents a person’s contractual entitlement (all or part of, or an undivided interest in). This right may exist now or may arise in the future as a result of the use of any service, facility, or other means. The bill changes the definition of receivables to include any money owed to the assignor by a debtor for tolls or the use of any facility or service.
• Change in the definition of assignment: The Act defines assignment as the transfer (by agreement) of an assignor’s undivided interest in any receivable due from the debtor to the factor.
• The bill modifies the definition to include the phrase “such a transfer.”
• Changes to the definition of a factoring business: The Act defines a factoring business as one that: acquires an assignor’s receivables by accepting assignment of such receivables, or (ii) finances receivables secured by security interests through loans or advances. The bill clarifies that factoring is defined as the acquisition of an assignor’s receivables via assignment for a fee. The acquisition should be made with the intention of collecting receivables or obtaining finance against such an assignment.
• No corporation can participate in factoring operations without first registering with the Reserve Bank of India, according to the Act (RBI). To engage in a factoring business, a non-banking financial company (NBFC) must have I financial assets in the factoring business, and (ii) income from the factoring business, both of which must be greater than 50% (of gross assets/net income) or above a threshold determined by the RBI. For NBFCs to engage in factoring activity, the Bill eliminates this barrier.
• Factors are obligated to register the details of every transaction or assignment of receivables in their favor under the Act. Within 30 days of receiving these details, they should be filed with the Central Registry established under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. If they fail to do so, the company and each officer who fails to comply may be fined up to 5,000 rupees each day until the default is resolved. The bill eliminates the 30-day time limit. It indicates that the regulations may specify the time period, method of registration, and payment cost for late registration.
• Furthermore, where trade receivables are funded through a Trade Receivables Discounting System (TReDS), the details of the transactions shall be reported with the Central Registry on behalf of the factor by the concerned TReDS. TReDS is an electronic platform for simplifying the financing of Micro, Small, and Medium Enterprises’ trade receivables.
• The Reserve Bank of India (RBI) will issue regulations: The Bill authorises the RBI to issue regulations on I how to grant registration certificates to a factor, (ii) how to file transaction information with the Central Registry for TReDS transactions, and (iii) any other matter as appropriate.

Conclusion:

The Bill eliminates the 30-day period in which the factors must register the details of each transaction they enter. The Central Registry, established under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, is the registering body for such transactions.

The Reserve Bank of India (RBI) will regulate

The Bill gives the RBI the authority to issue regulations for granting factor registration certificates, submitting transaction data with the Central Registry, and other concerns.