The Lok Sabha approved the Factoring Regulation (Amendment) Bill, 2021, on Monday. The Factoring Bill was introduced in the Lok Sabha on 14th September 2020. The proposed amendments in the Bill will boost the cash flows to the Micro, Small and Medium Enterprises (MSMEs).
The Factoring Regulation Bill aims to liberalise the Factoring Regulation Act, 2011 by expanding the scope of entities that can participate in factoring business. Broadening the scope of entities will provide more avenues for MSMEs and small businesses to access working capital credit.
Factoring is a business where an entity like MSME sells its receivables, i.e. dues from a customer to another party like a bank or Non-Banking Financial Company (NBFC), for immediate funds. It helps a business to raise quick working capital requirements. Many MSMEs participate in the factoring business to get working capital credit when their payments against supplies are stuck.
The Factoring Regulation Bill amendment seeks to allow all NBFCs to engage in the factoring business instead of a few selected ones. Previously, the Factoring Regulation Act allowed the Reserve Bank of India (RBI) authorisation NBFCs to carry out factoring business only if it was their principal business and more than half of their income earned and assets deployed was for factoring business.
The amendment Bill removes the threshold for NBFCs to engage in factoring business, thus opening an opportunity for more non-bank lenders other than the previously RBI authorised NBFCs to carry out factoring business. It, in turn, provides more avenues to the MSMEs for obtaining working capital through factoring business, especially the small businesses facing financial stress due to the COVID-19 pandemic.
There is an expectation that the amendment will help to increase the supply of funds available to the small businesses by allowing all NBFCs to undertake the factoring business. It will also lower the cost of funds and enable greater access to the credit required for small businesses, ensuring timely payments against their receivables.
The Factoring Regulation Bill also amends the definitions of ‘assignment’, ‘receivables’, ‘factoring business’ and insert a new definition of ‘Trade Receivables Discounting System’ to bring them in sync with the international definitions.
The banks and NBFCs acquire a company’s receivables at a discount and realise it from the entities that owe them money, which helps the company monetise its receivables quickly and tackle cash-flow problems. The Factoring Regulation (Amendment) Bill will immensely help the MSMEs and small businesses by giving more avenues to provide liquidity to them in this pandemic situation.
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