The Factoring Regulation (Amendment) Bill, 2021 will expand credit facilities for small businesses, and will help them in accessing funds from 9,500 non-banking financial companies (NBFC), Finance Minister Nirmala Sitharaman tweeted.
The amendments approved by Rajya Sabha Thursday will give an impetus to the economy by providing an efficient working capital cycle for micro, small and medium enterprises (MSMEs), Sitharaman said.
The Bill seeks to increase the number of NBFCs offering factoring service to over 9,500 from from seven currently. Factoring is a transaction where a business sells its receivables from a customer to a third party or a ‘factor' to get funds. Now all NBFCs will be permitted to undertake factoring business and participate on Trade Receivables Discounting System (TReDS) for discounting the invoices of MSMEs, Sitharaman said.
The Bill seeks to provide a strong oversight mechanism for the factoring ecosystem, and will empower the Reserve Bank of India to make regulations with respect to factoring business, Sitharaman said.
While moving the Bill in Lok Sabha for approval, Sitharaman had said the government has accepted the recommendations of the Standing Committee which had scrutinised the Bill last year.
The Standing Committee on Finance had suggested that best global practices be adopted to bring domestic factoring companies on a par with global peers and make credit finance more accessible to MSMEs.
Amending the Factoring Regulation Act, and changing the definition of “assignment”, “factoring business” and “receivables”, will bring them in consonance with international definitions, Sitharaman said.
The Factoring Regulation Act, 2011 was enacted for regulating the receivables to factors, making provision for registration for doing factoring business, and the rights of the parties in a factoring contract.
There is often a delay in MSMEs getting payment against their bills for supplying to various buyers.
This leads to locking of working capital and hampering productive activities of MSMEs, the Parliamentary Committee had said in its report. The amendments proposed by the government seek to resolve these issues and permit more categories of NBFCs to undertake factoring business, it had said. Factoring credit constitutes only 2.6 per cent of total formal MSME credit in India. It’s estimated that only 10 per cent of the receivable market is presently covered under formal bill discounting mechanism, while the rest is covered under conventional cash credit overdraft arrangements with banks, the report had said.