Recently Parliament passed 'Factoring Regulation (Amendment) B | ECONOMY by VIVEK SINGH

Recently Parliament passed "Factoring Regulation (Amendment) Bill, 2021". You do not need to go into the details of the Bill but you must understand the term 'factoring'.

First understand 'Receivables': If I have sold some product to a company (my customer) and I have raised a bill for the same then the bill amount (dues) which I am expecting to receive from the company is called 'Receivables'.

Factoring is a transaction where an entity (like MSMEs) sells its receivables (the dues from the corporate) to a third party (a 'factor' like a bank or NBFC) for immediate funds. So, the bank/NBFCs will provide immediate funds to MSMEs and they purchase the receivables of MSMEs, and the banks/NBFCs will be able to get the money from the corporate through the receivables that they (banks/NBFCs) will now be holding. Note that credit facilities provided by a bank against the security/collateral of receivables are not considered as factoring business. In case of 'factoring' the receivables (the dues) are sold rather than kept as collateral to raise finance.

Factoring is done on an online TReDS (Trade Receivables Discounting System) platform initiated by RBI.

Earlier Factoring could be done by the banks or NBFCs that have a factoring licence ( those who do over 50 per cent of business through factoring). Now, all NBFCs have been allowed to do factoring business, irrespective of proportion of income from factoring. This, therefore, will bring liquidity into factoring business.

NBFCs’ lending to MSMEs is typically against the balance sheet strength of these smaller companies, leading to interest rates that can be higher than 16 per cent. But in the case of factoring, the NBFC is taking a risk on the customer of the MSME who is larger corporate, leading to lower (nearly halving) interest costs.