RBI clarifies issues related to the business of factoring

The Factoring Regulation Act, 2011, enabled banks and non-banking financial companies registered as factors to undertake the business of factoring. The enactment of the Factoring Regulation Act was the first step taken by the government to regularize and facilitate the business of factoring in India. However, since banks and non-banking financial companies were both subject to the guidelines of the Reserve Bank of India (RBI) on matters pertaining to prudential norms and exposure requirements, there were glaring loopholes and unresolved issues regarding the conduct of the business of factoring by such entities.

Some of these issues were highlighted in this column in the February issue of India Business Law Journal. The RBI has taken steps to resolve these issues and provide clarity by way of its circular titled “Provision of Factoring Services by Banks – Review”, dated 30 July.

Clarifications

The circular has recognized three types of factoring services: (i) factoring “without recourse”, where banks will have no recourse against the assignor (owner of the receivable), except in the case of misrepresentation or non-performance of obligations by the assignor; (ii) factoring “with recourse”, where the sale of the receivables by the assignor to the banks would not amount to a true sale on the books of the assignor; and (iii) factoring with “limited recourse”, where the conditions of recourse may be contractually agreed between the bank and the assignor.

Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.