Credit and Finance for MSMEs: Lok Sabha on Monday passed the Factoring Regulation (Amendment) Bill, 2020 amid protest from the Opposition, to amend the Factoring Regulation Act 2011. Introduced in Lok Sabha in September last year, the bill will help micro, small and medium enterprises (MSME) tide over their issue of delayed payments as it seeks to broaden the participation of entities undertaking factoring. The bill is also likely to enhance traction on the TReDS platform introduced by the Reserve Bank of India back in 2014 for entrepreneurs to unlock working capital tied in their unpaid invoices. According to the government’s delayed payments monitoring portal MSME Samadhaan, over 83k delayed payment applications have been filed by micro and small enterprises, as of July 26, 2021, involving Rs 22,311 crore, of which 7,920 applications involving Rs 1,433 crore were disposed.
“One of the biggest problems faced by MSMEs was in terms of receivables and during both lockdowns, MSMEs have been affected the most as the moment when large industries stop functioning then automatically it impacts payments to MSMEs. Also, MSMEs generally keep borrowing at a much higher cost in comparison to large companies. So Factoring bill will help MSMEs monetise their receivables. This will be a big benefit to them as it will also help them in better managing their working capital and therefore will reduce their cost of working capital,” Madan Sabnavis, Chief Economist, CARE Ratings told Financial Express Online.
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The bill also seeks to permit non-banking finance companies (NBFC) other than those whose principal business is factoring to discount invoices on TReDS and also reduce the time period for registration of invoice and satisfaction of charge upon it in order to avoid the possibility of dual financing, Finance Minister Nirmala Sitharaman had said in the Statement of Objects and Reasons in the bill introduced last year.
As per the standing committee’s report, factoring credit contributes only 2.6 per cent of the total formal MSME credit in India versus 11.2 per cent in China, said Ram Iyer, Founder & CEO, Vayana Network. The bill, in that light, “heralds the growth of factoring business in India at par with developed countries. This would increase the number of factoring entities from the current seven to a few thousand. This would also increase the flow of credit exponentially while bringing down the cost of credit for MSMEs,” Iyer told Financial Express Online.
Back in January 2019, the RBI had constituted an expert committee on MSMEs under the Chairmanship of U.K. Sinha to help resolve MSMEs’ delayed payment issue. The amendments made to the bill were based on the recommendations by the committee. “Allowing NBFCs other than NBFC-factors to be a part of TReDS as financiers will allow TReDS to become accessible to a much wider spectrum of MSMEs. Many MSMEs which were supplying to lower-rated corporates were not able to discount their invoices. Recommendation for extending the pool of financiers was made in the UK Sinha Committee Report and the required legislative changes have seen the light of the day. TReDS has so far processed around 43,000 crores worth of invoices that have helped over 25,000 MSMEs with better liquidity and access to funds on favourable terms,” Ketan Gaikwad, MD & CEO, Receivables Exchange Of India Ltd. (RXIL) told Financial Express Online.