Bill bars FIs' direct foray into factoring

The Regulation of Factors (Assignment of Receivables) Bill 2011, was tabled in Lok Sabha by Finance Minister Pranab Mukherjee

The bill, among other things, seeks to provide for and regulate the assignment of receivables by making provision for registration and rights and obligations of parties.
Factors provide liquidity to small and medium enterprises against their receivables from customers and is regarded as a cash management tool.

Among other provisions, the Bill proposes to ban financial institutions from directly entering the factor business.

“The regulation of factor (Assignment of Receivables) Bill 2011 provides... for empowering the RBI to issue directions, call for information from the factor and prohibit the financial institutions from undertaking factoring business, if the factor fails to comply with the directions given by the RBI,” says the Bill’s statement of Objects and Reasons.

The Bill also provides for establishment of a Central Registry which would maintain details regarding all transactions carried out by factors. It makes registration of all factor transactions mandatory.

Penalties & punishment

Besides, factors would be entitled to take legal recourse for recovering assigned debt and receivables from buyers of goods and services.

The Bill imposes penalties and punishment for violation of provisions.

The Government had in 1993 enacted The Interest on Delayed Payments to Small Scale and Ancillary Industrial Untertakings Act which provided for mandatory payment by buyer to the supplier failing which he was required to pay interest.

The Act was repealed after introduction of the Micro, Small and Medium Enterprises Development Act 2006 which had provision for liability to buyer to make payment to supplier.

It was later felt that the situation of delayed payments to small-scale industries have not improved despite this.

In 1998, the RBI had appointed a committee headed by former State Bank of India Managing Director C S Kalyanasundaram for examining the feasibility and mechanics of starting factoring organisations of the country and provide other suggestions.

Besides the Committee, the government also received suggestions from Task Force on MSME set up by Prime Minister Manmohan Singh in 2010. The Bill takes into account most of the recommendations of the committees.