The Reserve Bank of India had reviewed the guidelines on provision of factoring services by banks and specified certain conditions under which banks can departmentally undertake factoring activities. To ensure against regulatory gaps/ arbitrage if any, arising from differential regulations as between NBFC-Factors and banks, the following clarifications/ instructions are being issued to NBFC – Factors for meticulous compliance.
2. Prudential Norms – Identification as NPA
It is clarified that receivable acquired by an NBFC- Factor which is not paid within such period of its due date, as applicable in terms of Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 or Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 or Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, should be treated as Non-Performing Asset (NPA) irrespective of when the receivable was acquired by the NBFC - Factor or whether the factoring was carried out on “with recourse” basis or “non-recourse” basis.
3. Exposure Norms-Single and Group Borrower Limits
It is clarified that for the purpose of compliance with concentration of credit norms, exposure shall be reckoned as under:
In case of factoring on “with-recourse” basis, the exposure would be reckoned on the assignor.
In case of factoring on “without-recourse” basis, the exposure would be reckoned on the debtor, irrespective of credit risk cover/ protection provided, except in cases of international factoring where the entire credit risk has been assumed by the import factor.
4. Risk Management
Proper and adequate control and reporting mechanisms should be put in place before such business is undertaken.
NBFC-Factors should carry out a thorough credit appraisal of the debtors before entering into any factoring arrangement or prior to establishing lines of credit with the export factor.
Factoring services should be extended in respect of invoices which represent genuine trade transactions.
Since under without recourse factoring transactions, the factor is underwriting the credit risk on the debtor, there should be a clearly laid down board-approved limit for all such underwriting commitments.
5. Exchange of Information
For the purpose of exchange of information, the assignor will be deemed to be the borrower. Factors and banks should share information about common borrowers. Factors must ensure to intimate the limits sanctioned to the borrower to the concerned banks/ NBFCs and details of debts factored to avoid double financing.