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Factoring Regulation (Amendment) Bill, 2020: All you need to know

While amending the Factoring Regulation Act, 2011, the Bill seeks to widen the scope of the entities which can get into the factoring business and also facilitate the factoring transactions

Finance Minister Nirmala Sitharaman  (Source: PTI) Finance Minister Nirmala Sitharaman (Source: PTI)

The Bill to amend the Factoring Regulation Act, 2011 could not be taken up for consideration and passage in the Lok Sabha today as both houses of the Parliament were adjourned due to disruption caused by Opposition protests on farm laws and snooping. However, here's an explanation of what the Bill seeks to achieve and how it will benefit the economy.  

Bill background

The Bill was introduced in the Lok Sabha in September last year. While amending the Factoring Regulation Act, 2011, the Bill seeks to widen the scope of the entities which can get into the factoring business and also facilitate the factoring transactions. It was referred to Standing Committee which gave its report in February this year.  

What is factoring?

Under the factoring business, an organisation (factor) takes over the receivables of another entity (assignor) on the basis of bill discounting. The arrangement involves receivables against a sale of goods or service by a seller to be sold to the factor at a discount, thereby making him liable for future debt collection from the buyer. In the interim, the factor essentially provides the much-needed liquidity for the operational expenses of the client.  

Going forward, the Factoring Regulation (Amendment) Bill, 2020 will provide more play for the Non Banking Financial Companies (NBFCs) to participate actively in the factoring business.  

Relaxation to NBFC factoring threshold  

In a move that will provide enhanced liquidity support to the Micro, Small and Medium Enterprises (MSME), the Bill has done away with threshold for NBFCs to get into the factoring business. As per the Factoring Regulation Act, 2011, both financial assets of an NBFC in the factoring business and its factoring business income should be more than 50 percent of the gross assets and net income, or more than a threshold notified by the Reserve Bank of India.

The removal of the threshold is expected to come as a win-win situation for both NBFCs as well as small businesses, which had been languishing due to lack of liquidity in the wake of the pandemic. While it widens the market for the NBFCs, small business will get access to working capital thereby contributing to the economic recovery.  

No time-bound registration

The Bill removes the 30-day time period for the factors to register the details of every transaction entered by them. The registering authority for such transaction is Central Registry setup under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.  

RBI to regulate  

The Bill empowers RBI to make regulations for granting registration certificates to a factor, filing of transaction details with the Central Registry and all other matters.

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