The amendments to the factoring law, which were approved by the Rajya Sabha on Thursday, would enable as many as 9,000 non-banking financial companies (NBFCs) to participate in the factoring market, instead of just 7 now, boosting cash flow to small businesses, finance minister Nirmala Sitharaman said.
Factoring is essentially a transaction where an entity (like MSME) sells its receivables (dues from a customer) to a third party (a ‘factor’ like a bank or NBFC) for immediate funds. It often helps a firm satiate its working capital requirement. Many MSMEs, whose payments against supplies are stuck, participate in the factoring business with receivables.
However, thanks to certain restrictive provisions in the extant law, amendments were brought in to widen the participation of entities, especially NBFCs, in the factoring business, thus expanding the avenues of working capital credit to even small businesses. The Bill also empowers the central bank to come out with norms for better oversight of the $6-billion factoring market.
The Lok Sabha already cleared the Factoring Regulation (Amendment) Bill, 2020, on Monday.
Speaking on the Bill in the Rajya Sabha, Sitharaman said, “You can imagine the number of MSMEs that will directly benefit because of this.”
Even as the economy is reviving, for MSMEs to have greater access to liquidity and working capital and have the opportunity to sell their receivables to a third party in exchange for cash will make a great difference to them, the minister said. Amid frequent disruptions in House proceedings, the Bill was passed without a proper discussion.
The new Bill will basically allow all NBFCs, instead of a select few, to engage in factoring business.
Despite growth in recent years, the factoring market accounts for only 0.2% of India’s GDP, way behind comparable developing economies such as Brazil (4.1%) and China (3.2%), according to a report of the parliamentary standing committee on finance, which endorsed the Bill. The factoring market worldwide is projected to reach $ 9.2 trillion by 2025.
The House panel, in its report submitted in February, stressed the need for the RBI to build sufficient regulatory resources to ensure effective supervision of factoring activities now that a large number of players may take part in such businesses with the implementation of the new norms.