SIDBI to create awareness of 'Factoring — Potential & Opportunity' amongst MSME manufacturers

BANGALORE, INDIA: The Small Industries Development Bank of India (SIDBI) is creating awareness of the benefits of Factoring services to manufacturers in the micro-small and medium enterprises (MSMEs) sector, who supply their products on credit terms to various purchasers in the domestic market with a view to assisting them in their receivable management as also providing them with finance against the receivables factored. In this regard, SIDBI organized a seminar of Factoring, its potential and opportunity at Bengaluru on July 09, 2012.

Mr. N. K. Maini Deputy Managing Director SIDBI said, “Recognizing importance of MSMEs in the Indian economy, the problem of delayed payments & receivable management and after identifying various limitations in the growth of factoring services, the Government of India (GOI) has taken serious efforts to enact a separate Factoring Act. This is likely to create a favourable legal environment in the economy for providing factoring services and is expected to benefit MSMEs especially Factoring without Recourse. The passing of the Act is expected to change the way Factoring business is being done as most of the legal limitations on growth of factoring business have been addressed through the Act.”

It is expected that MSMEs will stand benefited using factoring services as the Factoring organizations will bring in new products including Factoring without Recourse through the enabling legal framework. New NBFCs may come forward to register with Reserve Bank of India for undertaking factoring activities in view of potential business opportunity.

The factoring facilities can be extended to existing units in SSI-MSME sector - with good track record of performance and sound financial position - supplying components/ parts/ accessories/ sub-assemblies, etc., on short term credit to well established purchasers units. They should have been in operation for at least three years and have earned profits and/or declared dividend during the two years prior to taking up the scheme.

Factoring is a Receivable Management service wherein the seller encashes against his credit sales. Factor makes pre payment to the seller after deducting some margin, against production of sales invoices, collects the money from the purchaser on the due dates and pays balance amount to the seller after deduction of some charges. The principal distinctive feature here is Factoring provides funds based on the strength of the transaction between the client and its debtor rather than on collaterals and strong financials of the borrower under normal working capital arrangement thus proving ideal for SMEs in growth phase dealing with larger entities in capacity of supplier or customer. Besides MSMEs generally being a single man show normally find it difficult to manage their books and receivables which is taken care of by factoring.

The MSME sector contributes to economic growth, entrepreneurship development, financial inclusion and employment creation. There are 30 million MSME units in the country which is the second largest source of employment (70 million). The sector Contributes 45% of manufacturing output and 40% of exports and maintains a higher growth rate of 11% consistently even during crisis period. The growth of the sector is higher than industrial and overall economic growth.

Considering the challenging role of the apex Development Finance Institution (DFI), SIDBI intends to play ‘Credit-Plus’ role to fill the gaps in MSME eco-system, which are not addressed by banks and financial institutions. Besides meeting the financial gaps in niche areas, SIDBI provides need-based non-financial services by adopting Cluster Centric approach (as MSMEs reside in clusters) and upscaling promotional, developmental and socially responsible (CSR) support.

SIDBI also proposes to take initiatives to cover-up the non-financial gaps by removing informational asymmetry. It plans to host a website "SmallB.com" dedicated exclusively to MSMEs sector to help entrepreneurs setting up units and provide guidance in project appraisal and disbursement. SIDBI is also considering setting up marketing infrastructure and credit facilitation centers in various MSMEs clusters.

Factoring services could not gather momentum and pace in Indian Factoring Market on account of several legal and related issues. Worldwide factoring volume increased from 724 billion Euro in 2002 to 2015 billion Euro in 2011.  Asia’s factoring volume accounts for approx 25% of global factoring volume while India share in total factoring business of Asia is only 0.6%. 

The challenges before the enactment of the act namely inadequate legal framework, high stamp duty of assignment, no legal recourse on the buyer, limited legal recourse on the client, lack of central registry for creation of charge (thus vulnerable to fraud such as double financing, slow legal remedy for recovery of debts etc.) are set to change are addressed with the passing of the Factoring Regulation Act, 2012.  The act has provided for waiver of Stamp duty on assignment and it has also made it mandatory for sending notice of assignment to the debtor.  It has also clearly laid out rights and the obligations of the parties of the contract so that there is no conflict of interest with the working capital banker.  This has also provided for registration of assignment with the central registry, thus avoiding double financing by factoring organizations.