RBI norms on factoring business in the offing

The Reserve Bank of India (RBI) is planning to create a regulatory framework to monitor factoring business in the country.

The move comes close on the heels of the RBI receiving five applications for licence from international companies who want to set up factoring business.

Factoring is selling of a company's accounts receivables at a discount to an entity which assumes the credit risk. This entity makes upfront payment to the exporter, freeing it from the job of getting payments from the buyer. The recovery of payment for bills becomes a lookout of the factor.

The proposed regulation by the central bank for standalone factoring companies is expected to cover the minimum capital requirement for setting up a factoring business, direction, end use, due diligence, foreign exchange dealers' approval, prudential norms, regulatory reporting requirements, inspection by regulatory bodies, classification of loans which remain unpaid for a certain period and whether public deposits should be accepted or not, said an industry source.

Bibby Financial Services is one of the licence seekers. The Australian company has business interests ranging from shipping and logistics to distribution of financial services such as factoring, invoice discounting, recruitment finance, asset finance, construction finance and trade services.

The second application is from UAE Exchange, an exchange house in the Middle East catering to the remittances by Non-Resident Indians (NRIs) in partnership with Dr B R Shetty. Other applications are from US firms.

Currently, schedule banks can do factoring without an RBI licence. However, non-banking finance companies need an authorised dealers licence from the RBI for getting into export and import factoring. On the other hand, no licenses is required for domestic factoring and NBFCs registered with the RBI can enter into the filed.

"Though the RBI in last December had introduced guidelines for NBFCs which are non-deposit taking and having assets of more than Rs 100 crore (now categorised as systemically important NBFCs). The RBI is considering whether activity wise, there should be additional guidelines from a regulatory point of view," said an official.

So far, the country has seven factoring companies which are into international factoring business. These are: SBI Factors and Commercial Services, CanBank Factors, Foremost Factors, Global Trade Finance, CitiBank NA, HSBC, and the government-owned Export Credit Guarantee Corporation.

According to estimates, factoring is a $1.3-trillion business globally and it is just 2 billion in India. The annual growth rate of factoring in the country is 30 per cent and industry observers see it growing at 50-60 per cent in the next five years.