Factoring Regulation (Amendment) Bill 2020

Topics Covered: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Factoring Regulation (Amendment) Bill 2020:

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Context:

The Bill was recently passed by the Lok Sabha. The Bill seeks to widen the scope of entities that can engage in factoring business.

What is factoring?

Factoring is a transaction where an entity (like MSMEs) ‘sells’ its receivables ( dues from a customer) to a third party ( a ‘factor’ like a bank or NBFC) for immediate funds (partial or full).

• Currently, seven non-bank finance companies called NBFC factors do the majority of the factoring through the principal business condition.

Key Provisions:

1. The Bill has done away with threshold for NBFCs to get into the factoring business.
2. It widens the scope of financiers and to permit other non banking finance companies also to undertake factoring business and participate on the Trade Receivables Discounting System platform for discounting the invoices of micro, small and medium enterprises.
3. It reduces the time period for registration of invoice and satisfaction of charge upon it, in order to avoid possibility of dual financing.
4. It empowers the Reserve Bank of India to make regulations with respect to factoring business.

Significance:

1. Allowing non-NBFC factors and other entities to undertake factoring is expected to increase the supply of funds available to small businesses.
2. This may result in bringing down the cost of funds and enable greater access to the credit-starved small businesses, ensuring timely payments against their receivables.
3. Steps like integration with GSTN, mandatory listing of the government dues and direct filing of charges will improve the operational efficiency and acceptability of the platforms among the financiers.

Insta Curious:

Do you know the difference between factoring and forfaiting? Reference: 

Sources: the Hindu.