MSME liquidity line set to widen as extra NBFCs begin ‘factoring’

Parliament’s clearance to The Factoring Regulation (Amendment) Bill, together with a authorities plan to mandate firms with over Rs 250-crore annual turnover to register on the TReDS (Trade Receivables Discounting System) platform, will considerably enhance funding availability for MSMEs, decrease curiosity prices and enhance money administration, business sources stated.
Currently a handful of NBFCs and banks had been offering funding to MSMEs towards their receivables. Factoring regulation amendments have been cleared in each Houses of Parliament within the present session. This will allow practically 9,000 NBFCs to take part within the factoring market as an alternative of simply seven now. Improved participation by NBFCs within the factoring market will improve liquidity for MSMEs and decrease their curiosity prices.
Factoring is a transaction the place an entity (like MSME) sells its receivables (dues from a company) to a 3rd celebration (a ‘factor’ like a financial institution or NBFC) for quick funds. Banks and NBFCs present finance towards these receivables, enabling availability of prepared funds for the MSMEs. This is completed on a web-based TReDS platform initiated by the Reserve Bank of India (RBI). TReDS facilitates financing and discounting of MSME commerce receivables via a number of financiers.
“Only in India, factoring could be done by the banks or NBFCs that have a factoring licence — those who do over 50 per cent of business through factoring. Now, all NBFCs have been allowed to do factoring business, irrespective of proportion of income from factoring. This, therefore, brings liquidity into factoring business, which was deprived of it as only largely banks and few NBFCs could participate in it,” stated Sundeep Mohindru, CEO of M1exchange, a web-based platform for commerce receivables.
NBFCs’ lending to MSMEs is usually towards the stability sheet energy of those smaller firms, resulting in rates of interest that may be larger than 16 per cent. But within the case of funding towards receivables (or factoring), the NBFC is taking a danger on the shopper of the MSME who’s bigger company, resulting in decrease (practically halving) curiosity prices, he stated.

ExplainedWhat is factoring?`Factoring is a transaction the place an entity (like MSME) sells its receivables (dues from a company) to a 3rd celebration (a ‘factor’ like a financial institution or NBFC) for quick funds. Banks and NBFCs present finance towards these receivables, enabling availability of prepared funds for the MSMEs.

The Finance Ministry additionally plans to just accept suggestion of a Parliamentary panel learning the influence of Covid-19 on MSMEs that it must be made necessary for CPSEs with turnover of over Rs 250 crore to register on TReDS platform, a senior authorities official stated. “As on 31.12.2020, of 4,599 companies having turnover of more than Rs 500 crore, as identified by the Ministry of Corporate Affairs, 1,461 companies have registered themselves on TReDS platform. 170 CPSEs and 3,903 MSMEs registered with these CPSEs have also been onboarded on the platform. Totally, 11,690 MSMEs have on-boarded,” the Department-related Parliamentary Standing Committee on Industry famous in its report on MSMEs final week.
“The Committee recommends that the registration should be made mandatory for all CPSEs having a turnover of more than Rs 250 crore (from Rs 500 crore at present) as it would enlarge the ambit of TReDS,” it stated. Every tax bill raised by GST-registered MSMEs ought to replicate routinely on the TReDS platforms.
The authorized adjustments have additionally enabled intermediaries to register a factoring transaction on the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) portal as an alternative of the present observe of banks doing task in CERSAI one after the other.
With 3,000-5,000 factoring transactions in a single day, task entry onto CERSAI has been time consuming to date.
“Now the change in Factoring Act has permitted intermediaries like us to register the factoring unit directly on the CERSAI portal … this will reduce the lead time on operating on the portal from days to few minutes and hours. This makes the process faster, efficient and reduces chances of duplicity of transactions,” stated Mohindru.