Factoring Regulation (Amendment) Bill,2020 – UPSC GS2

What is Factoring?
  • Factoring is a business where an entity(factor) acquires the receivables of a company at a discount and realizes it from entities that owe the money. This helps the company to monetize its receivables quickly and tackle cash-flow problems.
  • Micro, small  and  medium  enterprises (MSMEs)  persistently  face  payment delays  from large clients. This hurdle will be tackled by factoring businesses.
  • When MSME suppliers have to wait long for payments, they sell the purchase invoices to factoring businesses.
  • These businesses buy the invoices at a discount so that MSMEs get their money quickly. Thus, factoring helps small firms to manage their working capital cycle.
Factoring Regulation (Amendment) Bill,2020:
  • The Factoring Regulation (Amendment) Bill, 2020 amends the Factoring Regulation Act, 2011 to widen the scope of entities that can engage in factoring business.
  • Key Provisions of the Bill:
    • Participation of NBFCs:
      • 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 the factoring business, to report every transaction within 30 days. The bill proposes that such finer details will be specified in regulations.
    • Removes RBI Authorization:
      • The existing law on factoring business enacted in 2011 allows the 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.

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