What changed
RBI updated its 2008 circular on bank finance to factoring companies to align with the Factoring Regulation Act, 2011. The new criteria require factoring companies to derive at least 75% of income and hold at least 75% of assets from factoring, excluding bill discounting. This replaces earlier conditions and references the new NBFC-Factor notification.
What it means for you
Banks must now ensure that factoring companies seeking finance meet stricter asset and income thresholds, with bill discounting excluded. This reduces risk by focusing on core factoring activities. Lenders need to verify compliance with the Factoring Regulation Act and RBI's NBFC-Factor norms before extending credit.
What you must do
- Update internal lending policies to require factoring companies to meet the 75% income and asset thresholds from factoring, excluding bill discounting.
- Verify that borrowing factoring companies are registered and compliant with the Factoring Regulation Act, 2011, and RBI's NBFC-Factor notification.
- Ensure that financial assistance to factoring companies is secured by hypothecation or assignment of receivables.
- Review existing exposures to factoring companies for compliance with the new criteria and adjust if needed.
Who it affects
All scheduled commercial banks (excluding RRBs), Factoring companies seeking bank finance, NBFC-Factors registered under the new category
What is the key change in the eligibility criteria for factoring companies?
Factoring companies must now derive at least 75% of their income from factoring and have at least 75% of their assets in factoring receivables, excluding bill discounting. They must also comply with the Factoring Regulation Act, 2011.
Does this circular affect existing bank loans to factoring companies?
Yes, banks should review existing exposures to ensure factoring companies meet the new criteria. If not, banks may need to adjust or restructure the finance.
What is the role of the NBFC-Factor notification in this circular?
The circular references the NBFC-Factor notification (July 23, 2012) which defines the 'principal business' for such NBFCs. Banks must ensure factoring companies meet these conditions for bank finance eligibility.