The Factoring Regulation Amendment Act of 2021 was passed into by the Ministry of Law and Justice on August 23, 2021. This law would boost lending facilities for small companies and make it easier for them to receive cash from 9000 NBFCs (Non-Banking Financial Companies). The reforms would drive the economy forward by providing an effective working capital cycle for MSMEs.
Factoring is a monetary transaction in which a company or firm sells its accounts receivable invoices at a discount to a third party known as a factoring firm in order to get immediate funds to maintain operations. The factoring company or corporation promptly pays a part of the bills. To optimize their cash flow, businesses frequently factor in receivables. Factoring is not the same as bank loans. The receivables of the business selling its receivables are important in factoring.
Three parties are involved in a factoring transaction. The entire amount due or yet to be paid by customers (referred to as debtors) to the assignor for the use of any products, services, or facility is referred to as receivables.A bank, a registered non-banking financial firm, or any other corporation registered under the Companies Act can be called as factors.
Trade Receivables Discounting system to register charges (TReDs)-
TReDS is a digital stage that covers MSMEs’ trade receivables (Micro, Small, and Medium Enterprises). The Factoring Regulation (Amendment) Act 2021 states that trade receivables are funded through the (TReDS) Trade Receivables Discounting System, and that the TReDS must register transaction data with the Central Registry on behalf of the factor.
Relaxation of the NBFC Factoring Threshold:
The Factoring Regulation (Amendment) Bill 2021 modifies the Factoring Regulation Act of 2011 in order to extend the spectrum of businesses that can participate in factoring. The present law gives the Reserve Bank of India the power to allow NBFCs to stay in the factoring industry only if it is their principal activity and accounts for more than 50% of their assets and income. The Factoring Regulation (Amendment) Bill 2021 has removed this barrier, allowing more non-bank lenders to participate in this industry at a time when small enterprises are under financial strain.
The Reserve Bank of India will regulate:
It has authorized the Reserve Bank of India (RBI) to issue regulations allowing a factor to get a Certificate of Registration, file transactional information with the Central Registry, and handle all other requirements.
Alterations in Definitions:
The new Act amends the definition of the assignment, factoring, and receivables business to get them at par with the global definitions.
Registration is not Time Bound:
It also abolished the thirty-day time limit for the factors to record the specifics of every transaction they entered. The Central Registry, created by the SARFAESI Act of 2002, is the registration body for the transactions.
In order to ensure that national factoring bodies align themselves with international counterparts, and that credit financing is made more available to MSMEs, the Standing Committee on Finance has advocated best international practices. Amendments to the Factoring Act and the definition of “receivables” and “factoring” will bring it into line with worldwide objectives.
The Factoring Act 2011 was passed to check the receivable for factors and to provide for registration in a factoring contract for the factoring company and the parties’ right. MSMEs have a great deal of delay in receiving payment for delivery to different buyers. The Parliamentary Committee stated in its report that it leads to freezing of working capital and hindering MSME production operations. The Government’s proposed modifications are intended to alleviate issues and allow NBFCs to be classified more effectively. The credit in India represents only 2.6% of the total formal MSME loan. The official discounting technique is presently only expected to cover 10% of the receivable market, whilst the remainder is subject to regular cash credit overdraft arrangements with banks.
This new amendment Act of 2021 will prove beneficial to MSMEs. It will increase their purchasing capabilities for major manufacturers to assist mend the pandemic and mobility constraints supply chain. They will be financed easily by a vital factoring sector. Secondly, one impediment to lending for MSMEs is the lack of tangible assets against which lenders might extend loans. In this scenario, a strong ecosystem of factoring becomes relevance.