Basics of Factoring in India

Megha Mittal, Associate ( mittal@vinodkothari.com )
Factoring as an age-old concept has stood the test of time as it enabled businesses to resolve the cash flow issues, rendered liquidity, facilitated uninterrupted services and cushioned businesses against the lag in the billing cycles. Also the merit of the product lies in the simplicity of the concept which is well understood and accepted. 
The principles of factoring work broadly on the seller selling the receivables of a debtor to a specialised financial intermediary called a factor. The sale of the receivables happens at a discount and transfers the ownership of the receivables to the factor who shall on purchase of receivables, collect the dues from the debtor instead of the seller doing so, enabling the seller to receive upfront funds from the factor. This allows companies to cash in on their sales without having to wait for payments to come in from customers in due course. With the purchase of the receivables the factor enters the shoes of the seller and takes on the liability under the contract.

In India, Factoring is subject to the Factoring Regulation Act, 2011 and the RBI Non-Banking Financial Company – Factors (Reserve Bank) Directions, 2012. As per the extant laws only certain NBFCs (with atleast 50% of the assets and income representing assets and income from factoring business) or Banks and Gov. bodies can act as factors – this resulted in a limited volume of factoring in India, and thus the insignificant global presence. As such the Factoring Regulation (Amendment) Bill, 2020 proposes to widen the scope to all NBFCs along with other proposals to increase factoring volumes in India.
In this presentation, we have discussed the basics of factoring in India – 

For other articles on Factoring, see: 
  1. http://vinodkothari.com/staff-publications-factoring/
  2. http://vinodkothari.com/wp-content/uploads/2017/03/Export_Factoring.pdf
  3. http://vinodkothari.com/2018/09/growth-of-factoring-services-in-india/
  4. http://vinodkothari.com/2020/10/legal-framework-for-factoring-favorably-amended-for-nbfcs-and-msmes/
  5. http://vinodkothari.com/2021/02/factoring-law-amendments-backed-by-standing-committee/
2 replies
  1. KARANJIT BAJWA
    KARANJIT BAJWA says:

    We are an RBI Registered NBFC and since inception 28 years ago, have been engaged in financing two wheelers in Ludhiana. We have an impressive record of profit growth. We want to diversify into other products while safeguarding ourselves against NPAs.
    We need your advisory services to help us chart out a path for business growth in other products and sectors, clearly spelling out the ‘how-to’ aspect of entry and business building with new products.

    Reply

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