The factoring regulation bill seeks to liberalize NBFCs’ participation in the factoring business
The Lok Sabha (LS) on Monday passed a key legislation meant to make it easier for small businesses to monetize their receivables even as Union finance minister Nirmala Sitharaman tabled another bill on bankruptcy resolution of small businesses.
The Factoring Regulation (Amendment) Bill, which was tabled in Parliament last year, was passed on Monday. The bill seeks to liberalize the participation of non-banking financial companies (NBFCs) in the factoring business. It also removes the requirement of an entity in this business called factor to report every transaction within 30 days. The bill proposes that such finer details will be specified in regulations.
The existing law on factoring business enacted in 2011 allowed the Reserve Bank of India (RBI) authorization for NBFCs to remain in factoring business only if it was their principal business, with more than half of their assets deployed and income earned from factoring business.
The amendment bill removes this threshold. This is expected to open up the opportunity in this business to more non-bank lenders at a time small businesses are facing the financial stress of the second wave of the covid-19 pandemic.
Factors acquire the receivables of a company at a discount and realize it from entities that owe the money. This helps the company to monetize its receivables quickly and tackle cash-flow problems. The bill enables non-bank lenders other than the previously RBI-licensed NBFC factors to get into the factoring business, according to Ketan Gaikwad, managing director and chief executive officer of Receivables Exchange Of India (RXIL), a joint venture between Small Industries Development Bank of India (SIDBI) and the National Stock Exchange of India Ltd (NSE).
This increased competition in the factoring business has led to an increase in the potential usage and adoption by micro, small, and medium enterprises (MSMEs) of the country, Gaikwad said.
“Allowing non-NBFC factors and other entities to undertake factoring is expected to increase the supply of funds available to small businesses. 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," said Ram Iyer, founder and chief executive officer, Vayana Network, a trade financing platform.
Providing liquidity support to MSMEs has been a key element of the government’s strategy to help the economy brave the impact of the covid-19 pandemic. For this, schemes for loan guarantees and credit support were introduced in June as part of the ₹6.28 trillion economic revival package. India more than 60 million MSMEs, which are a major source of employment generation in rural and even urban areas.
The other bill that is relevant for small businesses tabled in the Lok Sabha on Monday is the Insolvency and Bankruptcy Code (IBC) Amendment Bill, 2021, to replace an ordinance issued in April. However, this could not be passed because of disruption in the House.
The ordinance offered a simplified alternative to the bankruptcy code for small businesses so that they could restructure their business without a disruption during the process. Unlike the general bankruptcy resolution provisions, pre-packs do not require the administrator appointed by creditors to take over the control of the company though the management’s actions will be closely monitored.
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