Factoring Business in India
Content
Factoring Business in India
Dr. Prashant S. Desai,
Assistant Professor,
NLSIU
“Factoring is a service involving the purchase by a
financial organization, called a factor, of
receivables owned to manufacturer and
distributors by their customers, with the factor
assuming full credit and collection
responsibilities.”
In other words, factoring is a financial transaction
whereby an exporter sells its accounts receivable
(i.e., invoices) to a third party (called a factor) at a
discount in exchange for immediate money with
which to finance continued business.
• It is a type of financial service provided by the
specialist organizations. It is one of the oldest
forms of business financing.
• Factoring is a service that covers the financing
and collection of account receivables in domestic
and international trade.
• Factoring differs from a bank loan in three main
ways. First, the emphasis is on the value of the
receivables (essentially a financial asset), not the
firm's credit worthiness. Secondly, factoring is not
a loan ‐ it is the purchase of a financial asset (the
receivable). Finally, a bank loan involves two
parties whereas factoring involves three.
• Factoring enables you to :
1. Instantly turn your receivables into cash.
2. Avail credit protection for your receivables.
3. Take well informed credit decisions.
4. Outsource your sales ledger administration.
• Factoring not only helps in expanding business,
but also provides with an efficient collection
mechanism and protection against bad debts.
CHARACTERISTICS OF FACTORING
• Usually the period for factoring is 90 to 150 days. Some
factoring companies allow even more than 150 days.
• Factoring is considered to be a costly source of finance
compared to other sources of short term borrowings.
• Factoring receivables is an ideal financial solution for
new and emerging firms without strong financials. This
is because credit worthiness is evaluated based on the
financial strength of the customer (debtor). Hence
these companies can leverage on the financial strength
of their customers.
• Bad debts will not be considered for factoring.
• Credit rating is not mandatory. But the factoring
companies usually carry out credit risk analysis
before entering into the agreement.
• Factoring is a method of off balance sheet
financing.
• Cost of factoring=finance cost + operating cost.
Factoring cost vary according to the transaction
size, financial strength of the customer etc. The
cost of factoring varies from 1.5% to 3% per
month depending upon the financial strength of
the client's customer.
DIFFERENT TYPES OF FACTORING
• Disclosed and Undisclosed
In disclosed factoring client's customers are notified of
the factoring agreement. Disclosed type can either be
recourse or non recourse.
In undisclosed factoring, client's customers are not
notified of the factoring arrangement. Sales ledger
administration and collection of debts are undertaken
by the client himself. Client has to pay the amount to
the factor irrespective of whether customer has paid or
not. But in disclosed type factor may or may not be
responsible for the collection of debts depending on
whether it is recourse or non recourse.
• Recourse and Non recourse
• In recourse factoring, client undertakes to collect
the debts from the customer. If the customer
don't pay the amount on maturity, factor will
recover the amount from the client. This is the
most common type of factoring.
• Recourse factoring is offered at a lower interest
rate since the risk by the factor is low. Balance
amount is paid to client when the customer pays
the factor.
• In non recourse factoring, factor undertakes to
collect the debts from the customer. Balance
amount is paid to client at the end of the
credit period or when the customer pays the
factor whichever comes first.
• The advantage of non recourse factoring is
that continuous factoring will eliminate the
need for credit and collection departments in
the organization.
ADVANTAGES OF FACTORING
• Factoring provides a large and quick boost to cash
flow. This may be very valuable for businesses
that are short of working capital.
• there are many factoring companies, so prices are
usually competitive.
• it can be a cost‐effective way of outsourcing your
sales ledger while freeing up your time to
manage the business.
• it assists smoother cash flow and financial
planning.
• some customers may respect factors and pay more
quickly.
• you may be given useful information about the credit
standing of your customers and they can help you to
negotiate better terms with your suppliers.
• factors can prove an excellent strategic as well as
financial resource when planning business growth.
• you will be protected from bad debts if you choose
non‐recourse factoring cash is released as soon as
orders are invoiced and is available for capital
investment and funding of your next orders.
DISADVANTAGES OF FACTORING
• Queries and disputes may have to be referred on.
For this reason, factoring works best when a
business is efficient and there are few disputes
and queries.
• The cost will mean a reduction in your profit
margin on each order or service fulfillment.
• It may reduce the scope for borrowing ‐ book
debts will not be available as security.
• Factors may want to vet your customers and
influence the way that you do business.
• It may be difficult to end an arrangement with a
factor as you will have to pay off any money they
have advanced you on invoices if the customer
has not paid them yet.
• Some customers may prefer to deal directly with
you.
• How the factor deals with your customers will
affect what your customers think of you. Make
sure you use a reputable company that will not
damage your reputation.
• You have to pay extra to remove your liability for
bad debtors.
Reason for Factoring
• Factoring is a method used by a firm to obtain
Cash when the available Cash Balance held by the
firm is insufficient to meet current obligations
and accommodate its other cash needs, such as
new orders or contracts.
• The use of Factoring to obtain the Cash needed to
accommodate the firm's immediate Cash needs
will allow the firm to maintain a smaller ongoing
Cash Balance.
• By reducing the size of its Cash Balances, more
money is made available for investment in the
firm's growth.
• A company sells its invoices at a discount to their
face value when it calculates that it will be better
off using the proceeds to strengthen its own
growth than it would be by effectively functioning
as its "customer's bank."
• Factoring occurs when the rate of return on the
proceeds invested in production exceed the costs
associated with Factoring the Receivables.
• Therefore, the tradeoff between the return the
firm earns on investment in production and the
cost of utilizing a Factor is crucial in determining
both the extent Factoring is used and the
quantity of Cash the firm holds on hand.
WORKING OF FACTORING
• First, importer places an order with the exporter
• Secondly, exporter gives the details of the
transaction to the factor
• Thirdly, exporter dispatches the goods to the
importer and sends an invoice well to pay the
amount on due date to the factor
• Exporter submits the copy of invoice to the factor
• Factor pays the amount to exporter
• Customer pays the amount to the factor on due
date
• Factor pays the balance to client
Factoring in India and role of Reserve
Bank
• Factoring service, which is perceived as
complimentary to bank finance, enables the
availability of much needed working capital
finance for the small and medium scale
industries especially those that have good
quality receivables but may not be in a
position to obtain enough bank finance due to
lack of collateral or credit profile.
• By having a continuous business relationship with
the factoring companies, small traders, industries
and exporters get the advantage of improving the
cash flow and liquidity of their business as also
the facility of availing ancillary services like sales
ledger accounting, collection of receivables,
credit protection etc.
• Factoring helps them to free their resources and
have a one stop arrangement for various business
needs enabling smooth running of their business.
• The Kalyana Sundaram Study Group set up by the
Reserve Bank of India in January 1988 to examine
the feasibility and mechanics of starting factoring
organizations in the country paved the way for
provision of domestic factoring services in India.
• The Banking Regulation Act, 1949 was amended
to include factoring as a form of business in
which the banks might engage.
• Reserve Bank of India issued guidelines
permitting the banks to set up separate
subsidiaries or invest in factoring companies
jointly with other banks.
• However, it was generally felt that absence of
Factoring Law was one of the major
impediments in the growth of factoring
business of the country including the heavy
stamp duty over assignment deed, ambiguity
in the legal rights of Factors in respect of
receivables etc.
Suggestions of C.S. Kalayana
Sundaram Committee
• The Committee recommended the introduction
of Factoring services in India to complement the
services provided by banks. Export Factoring can
also be launched.
• Factors should cover wide range of industries
embracing all sectors of economy.
• The cost of funds should not be more than 13.5%
per annum. Factors will have to charge the price
for services at a rate not higher than banks. The
price for administrative services may not exceed
2.5 to 3 % of debt services.
• Factoring agencies may be promoted on zonal
basis. One each for North, South, East and West (
For South, Canara Bank has sponsored Can Bank
Factors Ltd. while in the Western Zone SBI Factors
Ltd. has been set up).
• Banks have considerable experience in financing
and collection of receivables. Besides, they have
access to credit information regarding both
sellers and buyers. An additional advantage is the
large network of branches.
• The companies which provide factoring in
India are Canbank Factors Limited, SBI Factors
and Commercial Services Pvt. Ltd, The
Hongkong and Shanghai Banking Corporation
Ltd. Global Trade Finance Limited, Export
Credit Guarantee Corporation of India Ltd,
Citibank NA, India and Small Industries
Development Bank of India (SIDBI)
• The Committee has recommended that the
Government may enact a suitable legislation for
the levy of penal interest for delayed payment
from the debtors beyond specified period. It has
also recommended that the Government should
exempt assignment of factored debts from stamp
duty.
• Factoring service so far not picked up in India due
to various deficiencies including high cost service
charges, documentation difficulties, legal lacuna,
etc.
• Government of India enacted the Factoring Act,
2011 to bring in the much needed legal
framework for the factoring business in the
country.
• It has provided definitions for the terms
factoring, factor, receivables and assignment.
• The Act also specifies that any entity conducting
factoring business would need to be registered
with RBI as NBFCs; while exempting banks,
government companies and corporations
established under an Act of Parliament, from the
requirement of registration with RBI for
conducting factoring business.
• The Act, thus, gave clarity to the activity of
assignment of receivables and also granted
exemption from stamp duty on documents
executed for the purpose of assignment of
receivables in favour of Factors thereby making
the business more viable.
• The Act also envisages that all transactions of
assignment of receivables shall be registered with
the Central Registry established under the
SARFAESI Act, 2002 to reduce the possibility of
frauds and for strengthening the due diligence
process for the clients.
• The Act has given powers to the Reserve Bank to
stipulate conditions for ‘principal business’ of a Factor
as also powers to give directions and collect
information from factors.
• Subsequent to the passing of the Act, the Reserve Bank
has created a separate category of NBFCs viz; NBFC‐
Factors and issued directions for their regulation.
• The prudential norms as applicable to NBFCs engaged
in lending business, has also been extended to the
NBFC‐Factors.
• Further, bank finance to factoring companies and the
factoring business conducted by banks are also
regulated by the RBI.
Challenges faced by factoring sector
• Introduction of credit insurance in the factoring
business and extending the scope of SARFAESI Act
to cover NBFCs for speedy enforcement of
security interest.
• As regards credit insurance, the Finance Minister,
in the Union Budget 2013‐14, has made an
announcement for setting up a Credit Guarantee
Fund with SIDBI for factoring, with a Rs 5 billion
corpus.
• As far as extension of the provisions of the
SARFAESI Act to NBFC is concerned, the final call
rests with the Government of India.
• Low penetration of factoring business in the
country still remains a challenge which could be
on account of lack of awareness among the users.
• With the necessary law now in place, sincere
attempts need to be made by the industry
through its associations and other fora for
articulating the benefits of factoring as not just
an alternative source of finance but also an
avenue for providing a bouquet of financial
services vis‐à‐vis traditional finance, to small
scale industries.
• They should be able to identify the untapped
potential clientele, especially in various SME
industry sectors, and create awareness on how
the higher cost of factoring vis‐à‐vis the
traditional finance is justifiable and cost effective
for the businesses in the long run.
• Factoring companies should also constantly
endeavour to upgrade their expertise on both
technological front as also on the operational
level for offering cost effective services to their
clientele.
The Factoring Regulation Act, 2011
• To provide and regulate assignment of
receivable by making provision for registration
of factors and assignment of receivables.
• To define the rights and obligations of parties
to contract for assignment.
• Stating the penalties and offences for the Act
• Sections 19,20,21 & 32 of the Act have been
brought into force from 2nd April 2012 by the
Central Govt. through the notification.
• Effect of the said notification:
• Filing of assignment of receivables which are in the
favour of factor for registration purpose has been
made compulsory.
• It has to be registered with the Central Registrar which
has been set up under Section 20 of Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI) and
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest (Central Registry)
Rules, 2011 (Central Registry Rules) made under
SARFAESI mutatis mutandis, apply to the record of
assignment of receivables in favour of a factor in the
Central Register with the Central Registry.
• The filing for the assignment of receivables has to
be done within 30 days from the date of
assignment or the date of establishment of
registry (which‐ever is earlier)
• Non‐filing of assignment for registration purpose
would lead to penalty for the defaulting parties.
• On‐realization of the assigned receivables or
settlement of claim against the debtor then the
factor shall file for satisfaction of the assignment
in the receivable in the favor of factor.
• The particulars of assignment of receivables
entered in the Central Register of such
transactions under section 19 are open for public
inspection and Central Register shall be
maintained in electronic form.
• Non‐filing for registration purpose would lead to
penalty for the company and every officer of the
company responsible for the act and the fine
imposed can extend to five thousand rupees each
day the default continues.
• Brief Over‐view of the Enforced Sections of the Act
• Section 19 of Act states that every factor before the
Central Registry which has been set up under section 20
of SARFAESI, within:‐
a. 30 days of assignment or
b. Date of establishment of registry
• The factor shall register the particulars of every
assignment transaction receivable in the favour of the
factor and receivables may be described specifically or
generally with reference to the debtor, or the period to
which they relate or by any other general description by
which such receivables can be identified and on
realization of receivables or settlement of the claim
against the debtors the factor shall file satisfaction of
assignment of receivables in its favour.
• The provisions for registration of transactions
contained in the SARFAESI and the rules made
there under shall, mutatis mutandis, apply to the
record of assignment of receivables in favour of a
factor in the Central Register with the Central
Registry.
• Section 20 of The Act – Particulars of transaction
of assignment of receivables entered in the
central register shall be open during business
hours for inspection by any person by payment of
the prescribed fee.
• Section 21 of the Act – If there is default in filing of
particulars of assignment of receivables and
realization by a factor then the default company and
every officer of the default company shall be
punishable with fine which may extend to five
thousand rupees for every day during which the
default continues.
• Section 32 of the Act gives the power to the Central
Government to make rules.
• Applicability of the enforced sections
a. Non‐Banking Financial Company (NBFC) as defined
in clause (f) of section 45‐I of the Reserve Bank of
India Act, 1934 which has been granted a certificate
of registration under sub‐section (1) of section 3.
b. Any corporate established under an Act of
Parliament or any State Legislature or any company
registered under the Companies Act, 1956 engaged
in the factoring business.
• Process of Filing for Registration Process:‐
• Factor has to file every particulars of transaction of
assignment with the Central Registry which is in his
favour in Form ‐I within 30 days from the date of
such assignment or from the date of establishment
of such registry, as the case may be, in the manner
and subject to payment of such fee as may be
prescribed as per Registration of Assignment of
Receivables Rules, 2012.
• but these Rules still have not been brought into
force and section19(4) of the Act states that
Central Registry Rules, 2011 shall apply where‐
ever required, thus it can be presumed that
Central Registry Rules, 2011 would apply at
present for registration purpose.
• The Form –I would be filled by such form shall be
authenticated by authorised representative of
Assignee/ Factor using a valid digital signature.
• Not filing of information is punishable by the way of
penalty and the company and the person of the
company who is liable to file information would be
the defaulters.
• On realization of the assigned receivables or
settlement of the claim against the debtors, the
factor shall file satisfaction of the assignment of
receivables in its favour in Form – II which shall be
authenticated by a person specified in the form for
such purpose by use of a valid digital signature.
• Test of Section 19 of the Act
• The test of section 19 is that the assignment of the
receivables have to be in the favour of the factor as
the section uses the words “assignment of
receivables in his favour”, meaning that only those
assignments which would be in the favour of the
factor would have to be filed with the central registry
to be registered.
• Another test of section 19 is the test of “engaged in
the business of factoring”. Section 2(i) of the Act
defines factor to be a certified Non Banking Financial
Company (NBFC) or body corporate established
under an Act of Parliament or any State Legislature
or any Bank or any company registered under the
Companies Act, 1956 who all are engaged in the
business of factoring.
Liability under the Enforced Sections
• It shall be the obligation of the factor to file
before the central registry for registration
purpose for all those assignment transactions
which are in the favour of the factor and it shall
not be the obligation of the assignor to file the
information for registration.
• The factor shall also have to file for registration
when the assigned receivables have been realised
or the claim has been settled against the debtors
as the language used by section 19 is that “factor
shall file satisfaction of the assignment of
receivables in its favour”.
• Every factor is compulsorily liable to file the
transaction of assignment for registration
purpose before the central registry as section 19
uses the words “shall file”, making it compulsory
on the part of the factor to file the information
for registration.
• On default of filing of the assignment of
receivables the parties responsible would be
liable for penalty buy the way of fine but the
assignment would not be cancelled for non‐filing
for registration process.
Implication on Non Banking Financial
Companies
• Filing of information for registration of
assignment of any type of receivables which is
receivable in the favour of the factor and when
the receivable has been realised has been made
obligatory on the part of NBFC.
• The assignment of receivables does not become
invalid due to the reason of non‐filing for
registration before the Central Registrar as
Section 21 of the Act of imposes penalty by the
way of fine on non‐filing.
• The registration process has been made
compulsory as section 19 uses the word “shall
file” and any default in filing shall be punishable
not only for the company but for every officer of
the company is in default.
• The information regarding the assignment of
receivables has to be filed for registration as per
the Registration of Assignment of Receivables
Rules, 2012 and rule 4 states that assignment for
receivables would be registered in the manner a
security interest is registered and same rules
would apply as it applies for security interest.
• The filing of information is to be made, i.e.
Form – I
• Financial details of the assignment.
• Is the assignment absolute without recourse
to the assignor?
• The description of document by which the
receivables are assigned
• Particulars of the principal terms and
conditions of the assignment agreement
• Thus the central registry is trying to keep a check
on as to what are and how the assignment is
being done and thus by this process the central
authority is keeping a check on the way the
assignment of receivables is done and it also
gives the power to persons to go and check the
details of the assignment.
• Thus the Act is trying to bring a process of truth
and fairness in the process which would give the
companies a chance to see whether the details
are true or not and it is also putting the
information of assignment in public domain.
Thanks
Dr. Prashant S. Desai,
Assistant Professor,
NLSIU
“Factoring is a service involving the purchase by a
financial organization, called a factor, of
receivables owned to manufacturer and
distributors by their customers, with the factor
assuming full credit and collection
responsibilities.”
In other words, factoring is a financial transaction
whereby an exporter sells its accounts receivable
(i.e., invoices) to a third party (called a factor) at a
discount in exchange for immediate money with
which to finance continued business.
• It is a type of financial service provided by the
specialist organizations. It is one of the oldest
forms of business financing.
• Factoring is a service that covers the financing
and collection of account receivables in domestic
and international trade.
• Factoring differs from a bank loan in three main
ways. First, the emphasis is on the value of the
receivables (essentially a financial asset), not the
firm's credit worthiness. Secondly, factoring is not
a loan ‐ it is the purchase of a financial asset (the
receivable). Finally, a bank loan involves two
parties whereas factoring involves three.
• Factoring enables you to :
1. Instantly turn your receivables into cash.
2. Avail credit protection for your receivables.
3. Take well informed credit decisions.
4. Outsource your sales ledger administration.
• Factoring not only helps in expanding business,
but also provides with an efficient collection
mechanism and protection against bad debts.
CHARACTERISTICS OF FACTORING
• Usually the period for factoring is 90 to 150 days. Some
factoring companies allow even more than 150 days.
• Factoring is considered to be a costly source of finance
compared to other sources of short term borrowings.
• Factoring receivables is an ideal financial solution for
new and emerging firms without strong financials. This
is because credit worthiness is evaluated based on the
financial strength of the customer (debtor). Hence
these companies can leverage on the financial strength
of their customers.
• Bad debts will not be considered for factoring.
• Credit rating is not mandatory. But the factoring
companies usually carry out credit risk analysis
before entering into the agreement.
• Factoring is a method of off balance sheet
financing.
• Cost of factoring=finance cost + operating cost.
Factoring cost vary according to the transaction
size, financial strength of the customer etc. The
cost of factoring varies from 1.5% to 3% per
month depending upon the financial strength of
the client's customer.
DIFFERENT TYPES OF FACTORING
• Disclosed and Undisclosed
In disclosed factoring client's customers are notified of
the factoring agreement. Disclosed type can either be
recourse or non recourse.
In undisclosed factoring, client's customers are not
notified of the factoring arrangement. Sales ledger
administration and collection of debts are undertaken
by the client himself. Client has to pay the amount to
the factor irrespective of whether customer has paid or
not. But in disclosed type factor may or may not be
responsible for the collection of debts depending on
whether it is recourse or non recourse.
• Recourse and Non recourse
• In recourse factoring, client undertakes to collect
the debts from the customer. If the customer
don't pay the amount on maturity, factor will
recover the amount from the client. This is the
most common type of factoring.
• Recourse factoring is offered at a lower interest
rate since the risk by the factor is low. Balance
amount is paid to client when the customer pays
the factor.
• In non recourse factoring, factor undertakes to
collect the debts from the customer. Balance
amount is paid to client at the end of the
credit period or when the customer pays the
factor whichever comes first.
• The advantage of non recourse factoring is
that continuous factoring will eliminate the
need for credit and collection departments in
the organization.
ADVANTAGES OF FACTORING
• Factoring provides a large and quick boost to cash
flow. This may be very valuable for businesses
that are short of working capital.
• there are many factoring companies, so prices are
usually competitive.
• it can be a cost‐effective way of outsourcing your
sales ledger while freeing up your time to
manage the business.
• it assists smoother cash flow and financial
planning.
• some customers may respect factors and pay more
quickly.
• you may be given useful information about the credit
standing of your customers and they can help you to
negotiate better terms with your suppliers.
• factors can prove an excellent strategic as well as
financial resource when planning business growth.
• you will be protected from bad debts if you choose
non‐recourse factoring cash is released as soon as
orders are invoiced and is available for capital
investment and funding of your next orders.
DISADVANTAGES OF FACTORING
• Queries and disputes may have to be referred on.
For this reason, factoring works best when a
business is efficient and there are few disputes
and queries.
• The cost will mean a reduction in your profit
margin on each order or service fulfillment.
• It may reduce the scope for borrowing ‐ book
debts will not be available as security.
• Factors may want to vet your customers and
influence the way that you do business.
• It may be difficult to end an arrangement with a
factor as you will have to pay off any money they
have advanced you on invoices if the customer
has not paid them yet.
• Some customers may prefer to deal directly with
you.
• How the factor deals with your customers will
affect what your customers think of you. Make
sure you use a reputable company that will not
damage your reputation.
• You have to pay extra to remove your liability for
bad debtors.
Reason for Factoring
• Factoring is a method used by a firm to obtain
Cash when the available Cash Balance held by the
firm is insufficient to meet current obligations
and accommodate its other cash needs, such as
new orders or contracts.
• The use of Factoring to obtain the Cash needed to
accommodate the firm's immediate Cash needs
will allow the firm to maintain a smaller ongoing
Cash Balance.
• By reducing the size of its Cash Balances, more
money is made available for investment in the
firm's growth.
• A company sells its invoices at a discount to their
face value when it calculates that it will be better
off using the proceeds to strengthen its own
growth than it would be by effectively functioning
as its "customer's bank."
• Factoring occurs when the rate of return on the
proceeds invested in production exceed the costs
associated with Factoring the Receivables.
• Therefore, the tradeoff between the return the
firm earns on investment in production and the
cost of utilizing a Factor is crucial in determining
both the extent Factoring is used and the
quantity of Cash the firm holds on hand.
WORKING OF FACTORING
• First, importer places an order with the exporter
• Secondly, exporter gives the details of the
transaction to the factor
• Thirdly, exporter dispatches the goods to the
importer and sends an invoice well to pay the
amount on due date to the factor
• Exporter submits the copy of invoice to the factor
• Factor pays the amount to exporter
• Customer pays the amount to the factor on due
date
• Factor pays the balance to client
Factoring in India and role of Reserve
Bank
• Factoring service, which is perceived as
complimentary to bank finance, enables the
availability of much needed working capital
finance for the small and medium scale
industries especially those that have good
quality receivables but may not be in a
position to obtain enough bank finance due to
lack of collateral or credit profile.
• By having a continuous business relationship with
the factoring companies, small traders, industries
and exporters get the advantage of improving the
cash flow and liquidity of their business as also
the facility of availing ancillary services like sales
ledger accounting, collection of receivables,
credit protection etc.
• Factoring helps them to free their resources and
have a one stop arrangement for various business
needs enabling smooth running of their business.
• The Kalyana Sundaram Study Group set up by the
Reserve Bank of India in January 1988 to examine
the feasibility and mechanics of starting factoring
organizations in the country paved the way for
provision of domestic factoring services in India.
• The Banking Regulation Act, 1949 was amended
to include factoring as a form of business in
which the banks might engage.
• Reserve Bank of India issued guidelines
permitting the banks to set up separate
subsidiaries or invest in factoring companies
jointly with other banks.
• However, it was generally felt that absence of
Factoring Law was one of the major
impediments in the growth of factoring
business of the country including the heavy
stamp duty over assignment deed, ambiguity
in the legal rights of Factors in respect of
receivables etc.
Suggestions of C.S. Kalayana
Sundaram Committee
• The Committee recommended the introduction
of Factoring services in India to complement the
services provided by banks. Export Factoring can
also be launched.
• Factors should cover wide range of industries
embracing all sectors of economy.
• The cost of funds should not be more than 13.5%
per annum. Factors will have to charge the price
for services at a rate not higher than banks. The
price for administrative services may not exceed
2.5 to 3 % of debt services.
• Factoring agencies may be promoted on zonal
basis. One each for North, South, East and West (
For South, Canara Bank has sponsored Can Bank
Factors Ltd. while in the Western Zone SBI Factors
Ltd. has been set up).
• Banks have considerable experience in financing
and collection of receivables. Besides, they have
access to credit information regarding both
sellers and buyers. An additional advantage is the
large network of branches.
• The companies which provide factoring in
India are Canbank Factors Limited, SBI Factors
and Commercial Services Pvt. Ltd, The
Hongkong and Shanghai Banking Corporation
Ltd. Global Trade Finance Limited, Export
Credit Guarantee Corporation of India Ltd,
Citibank NA, India and Small Industries
Development Bank of India (SIDBI)
• The Committee has recommended that the
Government may enact a suitable legislation for
the levy of penal interest for delayed payment
from the debtors beyond specified period. It has
also recommended that the Government should
exempt assignment of factored debts from stamp
duty.
• Factoring service so far not picked up in India due
to various deficiencies including high cost service
charges, documentation difficulties, legal lacuna,
etc.
• Government of India enacted the Factoring Act,
2011 to bring in the much needed legal
framework for the factoring business in the
country.
• It has provided definitions for the terms
factoring, factor, receivables and assignment.
• The Act also specifies that any entity conducting
factoring business would need to be registered
with RBI as NBFCs; while exempting banks,
government companies and corporations
established under an Act of Parliament, from the
requirement of registration with RBI for
conducting factoring business.
• The Act, thus, gave clarity to the activity of
assignment of receivables and also granted
exemption from stamp duty on documents
executed for the purpose of assignment of
receivables in favour of Factors thereby making
the business more viable.
• The Act also envisages that all transactions of
assignment of receivables shall be registered with
the Central Registry established under the
SARFAESI Act, 2002 to reduce the possibility of
frauds and for strengthening the due diligence
process for the clients.
• The Act has given powers to the Reserve Bank to
stipulate conditions for ‘principal business’ of a Factor
as also powers to give directions and collect
information from factors.
• Subsequent to the passing of the Act, the Reserve Bank
has created a separate category of NBFCs viz; NBFC‐
Factors and issued directions for their regulation.
• The prudential norms as applicable to NBFCs engaged
in lending business, has also been extended to the
NBFC‐Factors.
• Further, bank finance to factoring companies and the
factoring business conducted by banks are also
regulated by the RBI.
Challenges faced by factoring sector
• Introduction of credit insurance in the factoring
business and extending the scope of SARFAESI Act
to cover NBFCs for speedy enforcement of
security interest.
• As regards credit insurance, the Finance Minister,
in the Union Budget 2013‐14, has made an
announcement for setting up a Credit Guarantee
Fund with SIDBI for factoring, with a Rs 5 billion
corpus.
• As far as extension of the provisions of the
SARFAESI Act to NBFC is concerned, the final call
rests with the Government of India.
• Low penetration of factoring business in the
country still remains a challenge which could be
on account of lack of awareness among the users.
• With the necessary law now in place, sincere
attempts need to be made by the industry
through its associations and other fora for
articulating the benefits of factoring as not just
an alternative source of finance but also an
avenue for providing a bouquet of financial
services vis‐à‐vis traditional finance, to small
scale industries.
• They should be able to identify the untapped
potential clientele, especially in various SME
industry sectors, and create awareness on how
the higher cost of factoring vis‐à‐vis the
traditional finance is justifiable and cost effective
for the businesses in the long run.
• Factoring companies should also constantly
endeavour to upgrade their expertise on both
technological front as also on the operational
level for offering cost effective services to their
clientele.
The Factoring Regulation Act, 2011
• To provide and regulate assignment of
receivable by making provision for registration
of factors and assignment of receivables.
• To define the rights and obligations of parties
to contract for assignment.
• Stating the penalties and offences for the Act
• Sections 19,20,21 & 32 of the Act have been
brought into force from 2nd April 2012 by the
Central Govt. through the notification.
• Effect of the said notification:
• Filing of assignment of receivables which are in the
favour of factor for registration purpose has been
made compulsory.
• It has to be registered with the Central Registrar which
has been set up under Section 20 of Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI) and
Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest (Central Registry)
Rules, 2011 (Central Registry Rules) made under
SARFAESI mutatis mutandis, apply to the record of
assignment of receivables in favour of a factor in the
Central Register with the Central Registry.
• The filing for the assignment of receivables has to
be done within 30 days from the date of
assignment or the date of establishment of
registry (which‐ever is earlier)
• Non‐filing of assignment for registration purpose
would lead to penalty for the defaulting parties.
• On‐realization of the assigned receivables or
settlement of claim against the debtor then the
factor shall file for satisfaction of the assignment
in the receivable in the favor of factor.
• The particulars of assignment of receivables
entered in the Central Register of such
transactions under section 19 are open for public
inspection and Central Register shall be
maintained in electronic form.
• Non‐filing for registration purpose would lead to
penalty for the company and every officer of the
company responsible for the act and the fine
imposed can extend to five thousand rupees each
day the default continues.
• Brief Over‐view of the Enforced Sections of the Act
• Section 19 of Act states that every factor before the
Central Registry which has been set up under section 20
of SARFAESI, within:‐
a. 30 days of assignment or
b. Date of establishment of registry
• The factor shall register the particulars of every
assignment transaction receivable in the favour of the
factor and receivables may be described specifically or
generally with reference to the debtor, or the period to
which they relate or by any other general description by
which such receivables can be identified and on
realization of receivables or settlement of the claim
against the debtors the factor shall file satisfaction of
assignment of receivables in its favour.
• The provisions for registration of transactions
contained in the SARFAESI and the rules made
there under shall, mutatis mutandis, apply to the
record of assignment of receivables in favour of a
factor in the Central Register with the Central
Registry.
• Section 20 of The Act – Particulars of transaction
of assignment of receivables entered in the
central register shall be open during business
hours for inspection by any person by payment of
the prescribed fee.
• Section 21 of the Act – If there is default in filing of
particulars of assignment of receivables and
realization by a factor then the default company and
every officer of the default company shall be
punishable with fine which may extend to five
thousand rupees for every day during which the
default continues.
• Section 32 of the Act gives the power to the Central
Government to make rules.
• Applicability of the enforced sections
a. Non‐Banking Financial Company (NBFC) as defined
in clause (f) of section 45‐I of the Reserve Bank of
India Act, 1934 which has been granted a certificate
of registration under sub‐section (1) of section 3.
b. Any corporate established under an Act of
Parliament or any State Legislature or any company
registered under the Companies Act, 1956 engaged
in the factoring business.
• Process of Filing for Registration Process:‐
• Factor has to file every particulars of transaction of
assignment with the Central Registry which is in his
favour in Form ‐I within 30 days from the date of
such assignment or from the date of establishment
of such registry, as the case may be, in the manner
and subject to payment of such fee as may be
prescribed as per Registration of Assignment of
Receivables Rules, 2012.
• but these Rules still have not been brought into
force and section19(4) of the Act states that
Central Registry Rules, 2011 shall apply where‐
ever required, thus it can be presumed that
Central Registry Rules, 2011 would apply at
present for registration purpose.
• The Form –I would be filled by such form shall be
authenticated by authorised representative of
Assignee/ Factor using a valid digital signature.
• Not filing of information is punishable by the way of
penalty and the company and the person of the
company who is liable to file information would be
the defaulters.
• On realization of the assigned receivables or
settlement of the claim against the debtors, the
factor shall file satisfaction of the assignment of
receivables in its favour in Form – II which shall be
authenticated by a person specified in the form for
such purpose by use of a valid digital signature.
• Test of Section 19 of the Act
• The test of section 19 is that the assignment of the
receivables have to be in the favour of the factor as
the section uses the words “assignment of
receivables in his favour”, meaning that only those
assignments which would be in the favour of the
factor would have to be filed with the central registry
to be registered.
• Another test of section 19 is the test of “engaged in
the business of factoring”. Section 2(i) of the Act
defines factor to be a certified Non Banking Financial
Company (NBFC) or body corporate established
under an Act of Parliament or any State Legislature
or any Bank or any company registered under the
Companies Act, 1956 who all are engaged in the
business of factoring.
Liability under the Enforced Sections
• It shall be the obligation of the factor to file
before the central registry for registration
purpose for all those assignment transactions
which are in the favour of the factor and it shall
not be the obligation of the assignor to file the
information for registration.
• The factor shall also have to file for registration
when the assigned receivables have been realised
or the claim has been settled against the debtors
as the language used by section 19 is that “factor
shall file satisfaction of the assignment of
receivables in its favour”.
• Every factor is compulsorily liable to file the
transaction of assignment for registration
purpose before the central registry as section 19
uses the words “shall file”, making it compulsory
on the part of the factor to file the information
for registration.
• On default of filing of the assignment of
receivables the parties responsible would be
liable for penalty buy the way of fine but the
assignment would not be cancelled for non‐filing
for registration process.
Implication on Non Banking Financial
Companies
• Filing of information for registration of
assignment of any type of receivables which is
receivable in the favour of the factor and when
the receivable has been realised has been made
obligatory on the part of NBFC.
• The assignment of receivables does not become
invalid due to the reason of non‐filing for
registration before the Central Registrar as
Section 21 of the Act of imposes penalty by the
way of fine on non‐filing.
• The registration process has been made
compulsory as section 19 uses the word “shall
file” and any default in filing shall be punishable
not only for the company but for every officer of
the company is in default.
• The information regarding the assignment of
receivables has to be filed for registration as per
the Registration of Assignment of Receivables
Rules, 2012 and rule 4 states that assignment for
receivables would be registered in the manner a
security interest is registered and same rules
would apply as it applies for security interest.
• The filing of information is to be made, i.e.
Form – I
• Financial details of the assignment.
• Is the assignment absolute without recourse
to the assignor?
• The description of document by which the
receivables are assigned
• Particulars of the principal terms and
conditions of the assignment agreement
• Thus the central registry is trying to keep a check
on as to what are and how the assignment is
being done and thus by this process the central
authority is keeping a check on the way the
assignment of receivables is done and it also
gives the power to persons to go and check the
details of the assignment.
• Thus the Act is trying to bring a process of truth
and fairness in the process which would give the
companies a chance to see whether the details
are true or not and it is also putting the
information of assignment in public domain.
Thanks
