Lok Sabha passes Factoring Amendment Bill

July 27, 2021

On 26^th July, 2021 the Lok Sabha passed the Factoring Amendment Bill to amend the Factoring Regulation Act 2011. This bill will broaden the scope of the entities which can participate in the factoring business and also will ensure that strong oversight and regulatory mechanisms are put in place. Nirmala Sitharaman, Finance Minister of India, stated that the changes are being made to help the micro, small and medium enterprises (MSMEs) sector.

Highlights

In September 2020, this was introduced in the Lok Sabha. This bill will help the micro, small and medium enterprise (MSME) sectors of the country to settle their issue regrinding delayed payments.
The bill is will also enhance traction on the TReDS platform which was introduced by the Reserve Bank of India in the year 2014 for the entrepreneurs so that they can unlock working capital which is tied to their unpaid invoices.
As per, governments delayed payments monitoring portal MSME Samadhaan, more than 83000 delayed payment applications have been filed by MSMEs which involve an amount of Rs 22,311 crore. Out of these applications 7920 applications involving Rs 1,433 crore were disposed.
In comparison to the large companies, MSMEs keep borrowing at a much higher cost and hence, this Factoring bill will help them to monetise their receivables which in turn will help them in managing their working capital and reducing their working capital cost.
In India, factoring credit contributes to only 2.6 % of the total MSME credit whereas in China it is 11.2 %.

Other aspects of the bill

The number of factoring entities will be increased from seven to a few thousand. This flow of credit will also be increased exponentially while cost of credit for MSMEs will be brought down. In 2019, under the Chairmanship of U.K. Sinha, RBI had constituted an expert committee on MSMEs to help resolve delayed payment issue of MSME’s. The amendments made to the bill were based on the recommendations by the U.K Sinha committee.

TReDS

TReDS is an electronic platform introduced by RBI for facilitating the financing and discounting of the trade receivables of MSMEs via various financiers.

So far TReDS has processed nearly 43,000 crores worth of invoices that have helped more than 25,000 MSMEs with better access to funds and liquidity.

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