The government has ruled out fixing the rate of commission charged by firms from MSMEs (medium, small-scale and micro enterprises) for taking the responsibility of realising payments of goods and services sold by these firms.
The term for entities taking up this job is ‘factors’.
The ministry, responding to various questions raised by a Parliament standing committee on the Regulation of Factor (Assignment of Receivables) Bill, said the amount of commission charged by the factor would depend on the bilateral contract between the two and the level of competition in the market.
The rate of commission would also depend on the risk of perception of the factor and business relations between the two parties, the standing committee was told. The ministry said the Bill, tabled in the previous session of Parliament, is geared to provide the benefit of upfront payment to MSME, which then would not have to bother about collection of money from the buyers of goods and services.
The banking regulator, Reserve Bank of India (RBI), had moved away from an administered rate of interest regime for financial products. Therefore, any suggestion to administratively determine the rates would not be in line with the existing policy, the finance ministry told Parliament’s standing committee.
After sale of products and services, MSMEs do not realise sale proceeds (receivables) within a reasonable time and the factor steps in to purchase such receivables. Factor purchases the receivables and makes payment to the MSME. That way, MSME receives an upfront cash payment, say, equal to 80 per cent of the face value of the receivables. When the receivables are collected in full by the factoring firm, the MSME is paid the other 20 per cent, minus a commission that varies with interest rates prevailing in the money market.
Factors will be treated as non-banking finance companies (NBFCs); provisions of the RBI Act, relating to NBFCs will apply to them as well. The ministry clarified that a factor is not an agent for the sale of goods or services and steps in only after the sale is over.
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The factor is not concerned with sale, which will continue to be done by MSMEs in line with their existing practices, the ministry told the standing committee.
However, Adhatia or agent engaged in the business of agricultural produce will be out of the scope of the Bill as he is also engaged in the sale of goods. To clear confusion, the word factor will be used instead of ‘Adhati’ in the Hindi version of the Bill as well, the ministry said.