Login With Google
Factoring Regulation (Amendment) Bill, 2021
Why in news?
- The Factoring Regulation (Amendment) Bill, 2021 was passed by Parliament recently, bringing changes to the legislation to help Micro, Small and Medium Enterprises (MSME). It amended the Factoring Regulations Act, 2011.
- It will help expand Factoring business thus enabling ease of cash flow and reduction of risks for MSMEs.
Importance of MSMEs for India
- 63 mio enterprises (90% of industrial units) in India and 111 million employment opportunities.
- 45% of manufacturing output more than 40% of exports.
- 28% of gross domestic product.
What is meant by factoring?
- Factoring is a financial transaction and a type of debtor finance in which a business entity sells (called an assignor) its accounts receivable (i.e., invoices/outstanding bills) to a buyer (called a factor) at a discount.
- The buyer later collects the cash from the party that owes the bill earning a profit in the process.
Key Provisions:
- Definitions: It brings the definition of “receivables”, “assignment”, and “factoring business” in line with international definitions.
- Scope: It widens the scope of entities who can engage in factoring business by allowing other NBFCs to enter this business.
- Banks, non-bank financial companies, or any company registered with the Companies Act can be factors.
- Reserve Bank of India (RBI) the authority to make regulations regarding the issuance of registration certificates to factors and the submission of transaction details to the Central Registry.
- Registration: There is no longer a 30-day time period for the factors to register the details of every transaction they enter.
- This type of transaction is registered through the Central Registry established under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
Significance:
- More NBFCs: It will allow several NBFCs to enter the business of factoring thus opening a new business opportunity for such entities.
- Funding: Having non-NBFCs and other entities participate in factoring should increase small business funding sources.
- Cash Flow: It will increase the options for MSMEs for factoring and thus help ease their cash flow.
- Lower cost: It could result in lower funding costs and enable small businesses to access credit more easily, as well as ensuring timely payments against their receivables.
- Ease of doing business: The easier liquidity will help MSMEs run their business.
- Profitability: It will reduce the financial risk of MSMEs, improve their profitability and increase
- Oversight of RBI: Through the RBI, a strong regulatory and oversight mechanism will be set up that will broaden the scope of restrictions in the Act.
Conclusion:
- The changes in the law will make it easier for MSMEs to avail factoring services. But its success hinges on the ability of the NBFCs to get the receivables encashed on the due date.
- India's weak legal system riddled with excessive delays and corruption can render this business unviable. Hence appropriate judicial reforms and robust grievance redressal systems are necessary for its success.
Source : The Hindu