With RBI relaxing norms, factoring firms can now diversify business

With the Reserve Bank of India throwing a line to factoring companies by relaxing the principal business criteria, these companies can now diversify their business.

According to the relaxed principal business criteria, factoring companies have to ensure that their financial assets in the factoring business constitute at least 50 per cent (against 75 per cent earlier) of their total assets and their income derived from factoring business is not less than 50 per cent (75 per cent) of their gross income. A factoring company (also known as a factor) is a non-banking finance company engaged in the business of acquiring receivables of business entities (sellers of goods) at a discount, thereby helping the entity become immediately liquid. The factor, in turn, recovers the dues from the buyer at the end of the credit period.

Arun Kumar Agarwal, MD & CEO, SBI Global Factors, said, “Because the factoring business itself was not going anywhere, … meeting the 75 per cent commitment meant that we had idle resources and we could not do anything. So, obviously our losses were mounting.

“So, what the Reserve Bank has recently done is that they have reduced the principal business criteria from 75 per cent to 50 per cent. This is a huge positive for the factoring companies because now they need not keep idle resources,” said Agarwal. Besides SBI Global Factors, the other standalone factoring companies in the country include Canbank Factors, IFCI Factors and India Factoring. Other financial intermediaries that undertake factoring in India include Export Credit Guarantee Corporation, Standard Chartered Bank, HSBC and DBS Bank.

Agarwal explained that following the RBI relaxation, factoring companies can at least undertake some other financial activity and generate revenues to meet their expenses.

On diversifying business, Agarwal said, “This is something we need to examine in consultation with our principal shareholders – SBI, SIDBI, Union Bank of India and Bank of Maharashtra.

“Now, we need to decide what other activities we can undertake. But again, we don’t want to lose our focus and shift to some other activity at the cost of factoring. We are principally a factoring company and we want to promote this mode of financing.”

Besides its principal business of factoring, SBI Global Factors also undertakes Letter of Credit (LC) bill discounting. “It (LC bill discounting) is a fairly straight-forward kind of transaction. Our risk is on the bank which is opening the LC. So, it is a relatively risk-free business. It also meets the corporates’ requirement of funds. So, in a way, it helps corporates also but simultaneously it helps us also because we also get some revenue,” said Agarwal.

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