Factoring Bill receives LS nod, to boost cash flow to MSMEs

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Finance Minister Nirmala Sitharaman indicated that the amendments to the factoring law got acceptance from the Lok Sabha on the last day and it will boost the cash flow to the Micro, small and medium enterprises (MSMEs).

The Factoring Regulation (Amendment) Bill, 2020, looks to widen the involvement of organizations in the factoring business, and consequently, it is enlarging the lines of working capital credit to like the small businesses. It also moderated the prohibitive provisions in the remaining law and also it will authorize the central bank to emerge with norms for better supervision of the $6-billion factoring market. Minister Sitharaman said that the alterations are in sync with the recommendations made by the UK Sinha panel. And the Bill has already proceeded through the inspection of the standing finance committee, and the government has also welcomed their suggestions.

The Bill, which was moved without a genuine discussion among a din in the Lok Sabha and had been listed for last week. However, the discussions on the amendments couldn’t happen due to recurring disturbance in the House activities. The new Bill looks to permit all the non-banking financial companies (NBFCs) and alternatively of a select few, to capture in the factoring business.

While talking about the Factoring is essentially a major transaction where a business firm (like an MSME) vends its receivables (dues from a customer) to a third party like a ‘factor’ as a bank or NBFC for instant funds. It frequently aids a firm to satiate its instant working capital requirement. Many MSMEs, whose payments against supplies plunge and engage in the factoring business with receivables. Despite the extension in recent years, the factoring market has only accounted for 0.2% of India’s GDP and is way beyond similar developing economies like Brazil (4.1%) and China (3.2%) and as per the report by the parliamentary standing committee on finance, which evaluated the Bill. Worldwide the factoring market is forecasted to reach $ 9.2 trillion by 2025.

 In India, the factoring credit fabricates for only 2.6% of total official MSME loans and the way below 11.2% in China. Additionally, only 10% of the total receivable market is presently protected under a formal bill discounting mechanism. The factoring Bill also looks to alter the definitions of the terms like “assignment”, “factoring business” and “receivables”, to lead them in sync with the international definitions, and to place a new modish definition of “Trade Receivables Discounting System”.

The House panel, in its report presented in February, had emphasized the want for the RBI to make adequate regulatory resources and to make certain the effective management of factoring activities at present that a higher number of players may participate in such businesses.

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