The Rajya Sabha recently approved the Factoring Regulation (Amendment) Bill, 2021. This legislation aims to support the Micro, Small and Medium Enterprises (MSME) sector by altering existing rules guiding the factoring business. The bill also takes into account multiple recommendations made by the UK Sinha Committee.
Understanding Factoring Business
A factoring business is an arrangement in which one party acquires another party’s receivables for a predetermined amount. Receivables are essentially the total owed or yet-to-be-paid amount that customers, referred to as debtors, owe to the assignor. These debts result from the use of goods, services, or facilities. Note that credit facilities provided by a bank against the security of receivables are not classified as factoring business. The factor may be a bank, a registered non-banking financial company, or a company registered under the Companies Act.
Main Provisions of The Bill
A key aspect of the Factoring Regulation (Amendment) Bill is the redefinition of certain terms such as “receivables”, “assignment”, and “factoring business” to align them with international definitions. Additionally, the bill seeks to ease restrictions on non-bank finance companies’ (NBFCs) factoring businesses. Previously, the Reserve Bank of India only permitted those NBFCs to engage in factoring business if it was their principal business. However, this bill removes that restriction, thereby expanding the scope for more non-bank lenders to participate in the factoring business.
TReDS and Its Role
The Bill requires the details of transactions financed through the Trade Receivables Discounting System (TReDS) to be filed with the Central Registry, with TReDS being responsible for this filing. TReDS is an electronic platform designed to facilitate the financing of MSMEs’ trade receivables.
RBI’s Regulatory Role
The bill also empowers the Reserve Bank of India to oversee the registration certificates granted to a factor, the filing of transaction details with the Central Registry, and all other related matters. Additionally, it removes the previous requirement for factors to register transaction details within 30 days, with the Central Registry being the registering authority for these transactions.
Impact on Small Businesses
Enabling non-NBFC factors and other entities to participate in factoring is anticipated to increase the funds available to small businesses. This could potentially lower the cost of funds and increase credit access for these businesses, leading to more timely payments against their receivables. It may also ease liquidity, boost operational efficiency, and ensure smoother cash flow for MSMEs. Moreover, it is expected to relax restrictive provisions in the Act while also establishing a robust regulatory structure via the RBI.
The UK Sinha Committee
In 2019, the Reserve Bank established an eight-member expert committee led by the former chairman of the Securities and Exchange Board of India (SEBI), UK Sinha. The committee was tasked with reviewing the framework for the MSME sector and made several recommendations concerning amendments to the MSME Development Act, enhancements to the financial delivery mechanism, marketing support improvements, technological adoption encouragement, and strengthening of cluster development support for MSMEs.
