India Could Let More Financial Firms Enter The Factoring Business

Lok Sabha, the lower chamber of India’s bicameral parliament, was set to consider legislation on Tuesday (July 20) that would let more non-banking financial companies (NBFCs) participate in factoring, Financial Express reported.

In lieu of only allowing some NBFCs to participate in factoring, the new legislation aims to allow every NBFC to take part in that business.

Such an action might better the cash flow of micro, small and medium-sized businesses (MSMEs), which have been impacted by the pandemic.

Finance Minister Nirmala Sitharaman brought the Factoring Regulation (Amendment) Bill, 2020 into the Lok Sabha in September 2020. After that time, the Lok Sabha speaker passed the legislation onto the parliamentary standing committee for them to consider.

As the Financial Express reports, the factoring market in India comprises just 0.2 percent of India’s gross domestic product (GDP), even with expansion in recent years.

As PYMNTS previously reported, trade finance has slowly built a complex reputation in recent years as financial technology and advances in alternative lending made different methods of financing business-to-business (B2B) transactions available to more companies.

Some methods, such as factoring, involve a vendor, waiting on payments, selling an invoice to a financier at below its full value. Different methods, such as supply chain financing, involve the corporate purchaser starting the invoice funding workflow for the supplier.

In either case, the goal is to provide an advantageous situation for the B2B purchaser and the vendor, letting suppliers get funds faster on invoices that have not been paid while still providing time for the purchaser the settle the bill.

However, some critics of these financing avenues contend that they further the practice of deliberately holding back payment from small vendors and making these companies accept discounts on an invoice’s complete amount.

For opponents, trade finance can serve just as a bandage, and not a permanent fix, to the problem of B2B payments that do not arrive on time.