RBI narrows factoring window

Any company planning to undertake factoring business will have to register itself as an ‘NBFC-Factor’ with the Reserve Bank of India (RBI) and should have a minimum net owned fund of Rs 5 crore, the central bank said on Monday.

Factoring is a financial transaction where an entity sells its receivables to a third party called a ‘factor’, at discounted prices. RBI’s direction follows notification of the ‘Factoring Regulation Act, 2011’, which aims to regulate factors and assignment of receivables in favour of factors.

Under the Act, factoring companies other than banks and government companies would be registered with the RBI as non-banking financial companies (NBFCs). In accordance with the Act, RBI said it had been decided to introduce this new category of NBFCs and issue separate directions to these.

“Every company intending to undertake factoring business shall make an application for grant of certificate of registration as an NBFC-factor to the (Reserve) Bank,” RBI said.

Also, every company seeking registration as NBFC-Factor should have a minimum NOF of Rs 5 crore, the RBI said. However, existing companies seeking registration as NBFC-Factor but do not fulfil the NOF criteria may approach the RBI for time to comply with the requirement.

The apex bank further said that an NBFC-Factor should ensure that its financial assets in the factoring business constitute at least 75 per cent of its total assets and its income derived from factoring business is not less than 75 per cent of its gross income. The NBFC–Factor (Reserve Bank) Directions, 2012 come into operations with immediate effect.