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Relevance: Factoring will be one of the measures to revive MSMEs.
Synopsis: Recently, the Lok Sabha cleared the Factoring Regulation (Amendment) Bill that aims to support this sector.
Introduction:
Micro, small and medium enterprises (MSMEs) persistently face payment delays from large clients. This hurdle will be tackled by factoring businesses.
What is factoring business?
- When MSME suppliers have to wait long for payments, they sell the purchase invoices to factoring businesses.
- These businesses buy the invoices at a discount so that MSMEs get their money quickly. Thus, factoring helps small firms to manage their working capital cycle.
- Non-banking financial companies (NBFCs) and firms need a license to be in the factoring business, but not banks and statutory corporations.
How it is done?
- Factoring is done manually as well as over the electronic exchange called Trade Receivables Discounting System (TReDS).
- RXIL, Invoicemart, and M1xchange are three such platforms for online factoring.
What does the new Act seek to achieve?
Read – Factoring Regulation (Amendment) Bill,2020
Benefits to small businesses:
- Firstly, due to pandemic MSMEs suffering from the stretched payment cycle.
- It has lengthened the payment wait for MSMEs. A vibrant factoring industry will make financing smooth for them.
- It will improve their ability to purchase from large producers, which will help in repairing the supply chain disrupted by the pandemic and mobility restrictions.
- More players in the factoring business are expected to improve competition and efficiency.
- Secondly, one difficulty MSMEs have in access to credit is the absence of physical assets against which lenders could give credit. A robust ecosystem of factoring in this context assumes significance.
Hence, the number of players, as well as the factoring transactions, is expected to go up once the changes take effect.
