The government should encourage rating agencies to provide ratings to MSMEs that seek loans based on receivables, or factoring credit, the Parliamentary Standing Committee on Finance said in its report. With the government proposing amendments to the Factoring Regulation Act, 2011, the volume of business through factoring credit is expected to expand, according to the report.
“This may be accomplished by encouraging the existing credit rating agencies to provide ratings for the MSMEs that are actively seeking to factor in their receivables,” it said.
The Factoring Regulation (Amendment) Bill, 2020, was introduced in the Parliament in September 2020, and was referred to the Parliamentary Standing Committee on Finance for examination.
There is often 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 amendments proposed by the government seek to resolve these issues and permit more categories of NBFCs to undertake factoring business.
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 said.
As one of the principal instruments of working capital and trade finance, bill discounting and factoring remains underutilised, said the panel headed by BJP MP Jayant Sinha.
The panel 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.