Factoring Bill. Factoring Bill: ‘Integrate TReDS with GSTN e-invoicing portal’

The Standing Committee on Finance headed by Jayant Sinha has recommended the integration of Trade Receivables Discounting System (TReDS) platform with GSTN e-invoicing portal leading to automatic uploading of all GST invoices onto the TReDS platform to enable real time sharing of data that will allow buyers and sellers to have a single window access to invoices.

The availability of e-invoices, vetted through GSTN, will provide an added layer of authenticity, which will make the TReDS platform more attractive and give more comfort to the financiers. “This would encourage enterprises to make a shift to TReDS platform, and creating an efficient working capital cycle for MSMEs,” the Standing Committee said in its report on The Factoring Regulation (amendment) Bill 2020.

Details of report

This report also recommended that receivables coming from the Central and State governments should compulsorily be brought under the ambit of TReDS through this legislation so that payments pending from governments, which have already been approved for various MSMEs, are made available to them on a timely basis.

Government entities can use the TReDS platform to demonstrate that they are good at paying their bills and thus get more bidders for their projects. The Committee believes that making GSTN invoices available for factoring will generate tremendous volumes of receivables that can be financed and grow the factoring business manifold. It will increase competition and ensure a liquid market thereby reducing the price paid for factoring.

Also, the compulsory listing of all GSTN invoices on the TReDS and the consequent tracking of when these payments are made, provides excellent economic data on the state of the economy. “It will also provide valuable credit information to enable credit scoring of various companies and government entities,” the Panel has said.

It maybe recalled that the Factoring Regulation (amendment) Bill 2020 was introduced in the Lok Sabha in September 2020 and the purpose of the proposed amendments is to liberalise the restrictive provisions in the Act and at the same time ensure that a strong regulatory/oversight mechanism is in place through the Reserve Bank of India.

Background

A Trade Receivables Discounting System (TReDS) is an electronic exchange that allows transparent and online selling of receivables by MSMEs. In India, three entities (RXIL, M1xchange and Invoicemart) are running TReDS and have so far collectively discounted invoices worth ₹15,000 crore drawn by 25,000 MSMEs. TReDS came into existence in 2017.

‘Factoring’ is a transaction where an entity (like Micro, Small, Medium and Medium Enterprises) ‘sells’ its receivables (dues from a customer) to a third party (a ‘factor’ like a bank or NBFC) for immediate funds (partial or full).

Currently, 7 seven Non Banking Finance Companies (NBFCs) called NBFC Factors do the majority of ‘factoring’ through the ‘principal business’ condition. They are Canbank Factors, India Factoring and Finance, SBI Global Factors, Siemens Factoring, Bibby Financial Services, IFCI Factors and Pinnacle Capital Solutions.

Credit insurance

The Standing Committee has also recommended that credit insurance be extended for domestic factoring to provide additional protection to the factor and further encourage and promote the factoring companies to lend more aggressively to the MSMEs. Also, factoring companies should be granted status of specialised MSME funding entity so that a major portion of their corpus is earmarked for the benefit of MSMEs.

The Panel has also stressed the need to frame guidelines for the adoption of best technology and security standards, especially those related to block chain technology as the committee are of the opinion that it will be one of the prime drivers of factoring market growth during the coming years.

RBI as regulator

The Standing Committee sees the number of players expanding from the current seven NBFC-factors to potentially thousands of factors. “This will make RBI undertake a mammoth regulatory responsibility,” according to the Panel. The committee has stressed the need for RBI to build up sufficient regulatory staff/resources for efficient supervision of factoring activities so that the intent and purpose of the proposed amendments to address the lingering issues involving factoring industry, particularly the chronic delays in payment and liquidity crunch faced by enterprises, is effectively addressed.

The Committee also felt the RBI suggestion to replace the word ‘factor’ by ‘company’ with a view to expand the scope of business be explored by the Finance Ministry.

“This might cut red-tape by reducing the number of registrations required and make it easier for NBFCs to participate on the TReDS platform, while making the process seamless for the existing NBFCs to undertake factoring business by removing the mandatory requirement of separate registration as factors,” the Panel has said.

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