The factors business in India will come under regulation. Finance Minister Pranab Mukherjee will

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pilot a bill in the current Parliament session to empower the Reserve Bank of India to regulate the business, which is worth about Rs 50,000 crore a year.

Factors provide liquidity to small and medium enterprises against their receivables from customers in India and abroad. It can be regarded as a cash management tool in companies where long receivables are part of the business cycle. Factoring covers financing and collection of receivables.

A factor charges a service fee that varies with interest rates in the money market. The factor buys invoiced debt usually at about 80 per cent of its value from the selling company. This helps small and medium enterprises to concentrate on production and sales.

Several banks and financial institutions have floated factor subsidiaries after RBI allowed them. IFCI Factors, SBI Factors & Commercial Services, Canbank Factors, HSBC, SIDBI, Standard Chartered Bank apart from several non-banking finance companies (NBFCs) have floated factors to help their small and medium sized clients to mange delayed payments from buyers.

The new Regulation of Factor (Assignment of Receivables) Bill 2011 will empower RBI to regulate and oversee orderly development of factor services.

The finance ministry proposes to allow “without recourse” factor transactions – which means that companies selling receivables to factors will not be liable if the latter fail to realise invoiced debt. Till now most transactions have been “with recourse”. In effect, the factors take on the risk from small and medium companies.

The bill allows factors to take legal recourse to recover assigned debt and receivables from buyers of goods and services. The policy proposes to ban financial institutions from directly entering the factor business. It also makes mandatory registration of all factor transactions. The bill proposes severe penalties and punishment for violation of norms. At the same time, it protects certain rights of the factors.

The finance ministry has not accepted the suggestion of the SMEs ministry that stamp duty payable by factors be scrapped. Also rejected is its proposal to allow insurance firms to cover the ri­sk in factoring transactions. Instead, the finance minist­ry has directed IRDA to see how to provide such cover.

As per IFCI Factors, India accounts for a meagre 2.2 percent of the global factor business worth 1.325 trillion euros. Potential clients of the factor business include SMEs that account for 45 per cent of India’s industrial output and 40 per cent of exports. In 2012, these SMEs will account for 22 per cent of GDP. Dun & Bradstreet, an independent consultancy, has estimated that the factoring business could be worth Rs 2,45,000 crore in four years. Arjun Singh, an economist with D&B, said, “Factoring volumes in India are low because the legal, regulatory and support environment is not satisfactory”.

Most provisions in the factors bill are based on recommendations of an RBI appointed committee headed by former SBI MD Kalyanasundaram.