MSME liquidity line set to widen as more NBFCs start ‘factoring’

Source: Indian Express

Synopsis: Factoring law amendments have been cleared in both Houses of Parliament in the current session. This will enable nearly 9,000 NBFCs to participate in the factoring market instead of just seven now.

Background

Read here: https://forumias.com/blog/how-the-factoring-business-can-help-small-companies/

Benefits to small businesses: new Points

It will significantly boost funding availability for MSMEs, lower interest costs, and improve cash management.

1. The recent changes will enable the participation of nearly 9,000 NBFCs in the factoring market, compared to just 7 as of now. Improved participation by NBFCs in the factoring market will enhance liquidity for MSMEs and lower their interest costs.
2. Now, all NBFCs are allowed to do factoring business, irrespective of the proportion of income from factoring. This, therefore, brings liquidity into the factoring business, which was deprived of it as only large banks and few NBFCs could participate in it previously.
3. NBFCs’ lending to MSMEs is typically based on the balance sheet strength, leading to high lending interest rates. But in the case of funding against receivables (or factoring), the NBFC is taking a risk on the customer of the MSME who is larger corporate, leading to lower (nearly halving) interest costs, he said.