RBI adds `factoring' to priority sector to boost credit flow to MSMEs

Reserve Bank has included factoring transactions under priority sector lending with an aim to increase cash flow to small and medium enterprises.

Factoring is a type of financial transaction and debtor finance in which a business sells its invoices to a third party, called a factor, at a discount. Companies sometimes factor their receivable assets to meet their immediate cash needs.

"To increase liquidity support for the MSME sector, it has been decided that factoring transactions on 'with recourse' basis shall be eligible for priority sector classification by banks, which are carrying out the business of factoring departmentally," RBI said in a notification.

RBI said the factoring transactions taking place through TReDS will also be eligible for classification under priority sector upon operationalisation of the platform. TReDS is an exchange-based trading platform to facilitate financing of bills raised by such small entities to corporate and other buyers, including government departments and PSUs, by way of discounting.

RBI said banks may classify their outstanding factoring portfolio on the reporting dates under MSME category as per its Master Directions on PSL, wherever the 'assignor' in the factoring transaction is a micro, small or medium enterprise, subject to the corresponding limits for investment in plant and machinery/ equipment and other extant applicable guidelines for priority sector classification.

RBI said the bank should also obtain from the borrower periodical certificates regarding factored receivables to avoid double financing/ counting. Further, the 'factors' must ensure to intimate the limits sanctioned to the borrower to the concerned banks and details of debts factored taking responsibility to avoid double financing.