Revised factoring rules should help MSMEs out
An amendment of law is set to ease norms and let non-specialist NBFCs into the business of buying unpaid bills. MSMEs under stress could encash their dues if this market kicks off
Even when it’s business as usual, micro, small and medium enterprises (MSMEs) find it hard to recover their dues from big companies. Unpaid invoices leave working capital held up that ought to go back into operations to accelerate rotations of cash and gain efficiency. In crunch times, such hold-ups can be so long as to force some MSMEs out of business, as was reported in the cashless shock of 2016 and then during last year’s pandemic lockdown that abruptly snapped supply chains off. In a move aimed at relief for stretched MSMEs in the aftermath of a second covid wave, the Lok Sabha on Monday passed the Factoring Regulation (Amendment) Bill, 2020, which liberalizes the business of factoring. A factor is a financial intermediary that acquires the receivables of a company—say, one unable to chase payments on its own—at a discount to their value, and then recovers whatever it can from all the billed entities. This nascent market for unpaid bills needed broader participation for small businesses to have the option of gaining solvency by selling off dues. Modifying an enactment of 2011 that gave this market its legal frame, the 2020 bill drops the need for a factor to report every transaction within 30 days, and also opens up the field to non-banking financial companies (NBFCs) that do not operate as specialized factors, defined as intermediaries with factoring accounting for more than half their assets and income. If new factors step in, volumes could rise to the rescue of many small units.