RBI allows the Banks to go for Factoring
Updated: Aug 06, 2015 02:00:31pm
Mumbai, Aug 6 (KNN) RBI has recently notified detailed guidelines for carrying out factoring services, departmentally, through subsidiaries or investment in factoring companies. RBI has also allowed Banks to set up factor subsidiaries or investment in factoring companies subject to extant guidelines. However, investment of a bank in the shares of factoring companies and its subsidiary carrying on factoring business shall not exceed 10 per cent of the capital and reserves of the bank.
The notification, a significant move, keeping in view the tepid growth of factoring services even four years after enactment of the Factoring Act, stipulates that the business of factoring should be undertaken as per the provisions under the Factoring Regulation Act, 2011 and Banks may provide factoring services with recourse or without recourse or on limited recourse basis
The order also specifies that the pre-payment amount offered by banks for the receivables acquired under factoring should not exceed 80 per cent of the invoice value and Banks should carry out a thorough credit appraisal of the debtors before entering into any factoring arrangement or prior to establishing lines of credit with the export factor.
RBI also directs that since under without recourse factoring transactions, the factor is underwriting the credit risk on the debtor, there should be a clearly laid down board-approved limit for all such underwriting commitments.
As per the guidelines issued, factoring would be treated on par with loans and advances of the Banks and accordingly receivable acquired under factoring which is not paid within 90 days of the due date should be treated as non-performing asset (NPA) irrespective of when the receivable was acquired by the factor or whether the factoring was carried out on with recourse basis or non-recourse basis. The entity on which the exposure was booked should be shown as NPA and provisioning made accordingly.
The guidelines also clarify that any interest charged on the amounts granted as pre-payments will be as per the existing interest rates on advances. Any fee charged for various services rendered under factoring activities will be as per the RBI guidelines on bank charge.
Towards exchange of Information the borrower’s bank may also obtain from the borrower periodical certificates regarding factored receivables to avoid double financing. The guidelines also advises the Factors to intimate the limits sanctioned to the borrower to the concerned banks and details of debts factored taking responsibility to avoid double financing. This could be cross checked with the certificate obtained by banks from borrowers. (KNN/ DB)
The notification, a significant move, keeping in view the tepid growth of factoring services even four years after enactment of the Factoring Act, stipulates that the business of factoring should be undertaken as per the provisions under the Factoring Regulation Act, 2011 and Banks may provide factoring services with recourse or without recourse or on limited recourse basis
The order also specifies that the pre-payment amount offered by banks for the receivables acquired under factoring should not exceed 80 per cent of the invoice value and Banks should carry out a thorough credit appraisal of the debtors before entering into any factoring arrangement or prior to establishing lines of credit with the export factor.
RBI also directs that since under without recourse factoring transactions, the factor is underwriting the credit risk on the debtor, there should be a clearly laid down board-approved limit for all such underwriting commitments.
As per the guidelines issued, factoring would be treated on par with loans and advances of the Banks and accordingly receivable acquired under factoring which is not paid within 90 days of the due date should be treated as non-performing asset (NPA) irrespective of when the receivable was acquired by the factor or whether the factoring was carried out on with recourse basis or non-recourse basis. The entity on which the exposure was booked should be shown as NPA and provisioning made accordingly.
The guidelines also clarify that any interest charged on the amounts granted as pre-payments will be as per the existing interest rates on advances. Any fee charged for various services rendered under factoring activities will be as per the RBI guidelines on bank charge.
Towards exchange of Information the borrower’s bank may also obtain from the borrower periodical certificates regarding factored receivables to avoid double financing. The guidelines also advises the Factors to intimate the limits sanctioned to the borrower to the concerned banks and details of debts factored taking responsibility to avoid double financing. This could be cross checked with the certificate obtained by banks from borrowers. (KNN/ DB)
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