Wednesday, September 9, 2015

Factoring Services by Banks

Banks may undertake factoring activities departmentall,without obtaining the prior approval of RBI. Investment of a bank in the shares of factoring companies inclusive of its subsidiary carrying on factoring business shall not, in the aggregate, exceed 10% of the paid up capital and reserves of the bank.
Conditions:
Adherence to the provisions of Factoring Regulation Act, 2011
"assignee" means a factor in whose favour the receivable is transferred;
"assignor" means any person who is the owner of any receivable; and
"debtor" means any person liable to the assignor, to pay any receivable or discharge any obligation in respect of the receivable.
Board Approved Policy
Banks may formulate a comprehensive factoring services policy with the approval of their Boards and offer the services to their customers in accordance with this policy. The policy may specifically address issues pertaining to the various risks associated with this activity and put in place suitable risk mitigation measures.
Types of Factoring
Factoring services may be provided either with recourse or without recourse or on limited recourse basis.
Risk Management
Proper and adequate control and reporting mechanisms should be put in place .
  1. The pre-payment amount offered by banks for the receivables acquired under factoring should not exceed 80% of the invoice value.
  2. Banks should carry out a thorough credit appraisal of the debtors.
  3. Factoring services should be extended in respect of genuine trade transactions.
  4. 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.
Classification – Prudential Norms
Factoring would be treated on par with loans and advances. 
Exposure Norms-Single and Group Borrower Limits
The facilities extended would be covered within the overall exposure ceiling. 
  1. In case of factoring on with-recourse basis, the exposure would be reckoned on the assignor.
  2. In case of without-recourse basis, the exposure would be reckoned on the debtor, except in cases of international factoring where the entire credit risk has been assumed by the import factor.
Interest and Fees
Interest charged will be subject to the guidelines on interest rates on advances. Any fee charged will be subject to the guidelines on reasonableness of bank charges.
Accounting Treatment and Disclosure Norms
Receivables acquired under factoring should be treated as part of loans and advances. A separate disclosure may be made in the ‘Notes’ (Schedule 19 of the Balance Sheet) .
Exchange of Information
Banks and factors should share information about common assignor /borrowers. The bank may obtain periodical certificates regarding factored receivables. Factors must intimate the limits sanctioned to the borrower to the concerned banks and details of debts factored. Other sources, such as, information available with CERSAI on receivables assigned may also be considered.
Submission of Credit Information to CICs
Credit information regarding the non-payment of dues should be furnished to the CICs. 
Adherence to KYC Guidelines
The guidelines on KYC/AML/CFT should be adhered to.
Adherence to FEMA Guidelines
International factoring arrangements should be in compliance with FEMA guidelines.
Engagement of Recovery Agents
Engagement of recovery agents should be strictly as per RBI guidelines.
Outsourcing of Activities
Any outsourcing arrangement should adhere to RBI guidelines on “Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks”.
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Based on the RBI Circular dt 30/7/15.
Please visit www.rbi.org.in  for any further clarification if required…………….. Poppy