In this latest article from FCI Member, MNS Credit Management Group, they talk about the challenges that MSME's face when it comes to working capital.
Various fiscal, legal, and regulatory barriers, according to the World Bank, will stymie factoring services. In general, factoring requires solid historical credit information on all buyers; if this information is lacking, the factor assumes a significant credit risk.
In India, information on enterprises, their repayment record with the banking system, and so on is scarce, resulting in a dearth of data on which to base credit decisions." A major issue of concern is ‘fraud’ in this profession (e.g. bogus receivables (i.e., accommodation bills,viz., raising invoices without any genuine trade transaction) and non-existent customers).
Why did factoring fail to address late payments for SMEs, and what can be done now?
The main hurdle facing the MSME segment is lack of timely working capital. These small enterprises would be able to overcome their liquidity challenges if their receivables can be monetized; if their receivables were acceptable to factoring providers and could be factored. The best way to achieve this is to make factoring popular and make the receivables acceptable to factoring providers.
Unfortunately, several factors such as lack of awareness, a perception of high interest rates and cumbersome documentation processes, have prevented the growth of factoring services in India.
However, the Factoring Regulation (Amendment) Bill-2021 makes it simpler for NBFCs to enter the factoring industry thereby make the factoring services of over 5000 NBFCs available to the cash-strapped MSME sector, where many enterprises are now suffering from a shortage of capital. The present initiative is aimed at providing efficient working capital cycle for micro, small, and medium-sized firms (MSMEs) and, as a result, strengthen the country's economy.
The Reserve Bank of India (RBI) has the authority under the Factoring Regulation Act - 2011 to enable NBFCs to stay in the factoring sector if it is their primary focus and they have deployed over 50% of their assets and earned 50% of their revenue from it. This measure attempts to eliminate this barrier, allowing additional non-bank lenders to enter the market during the pandemic's present financial difficulties.
Factoring credit accounts for only 2.6 percent of total formal SME credit finance in India at the moment. According to the assessment, the bill discounting system currently covers only 10% of the receivable market, with the balance being serviced by traditional cash credit overdraft arrangements with banking institutions. The MSMEs struggle with working capital as a result of the delays in receiving payments against their bills, and this law tries to address this issue.
Conclusion
In these difficult times, factoring is a critical step toward economic stabilization. The NBFCs can assist cash-strapped MSMEs with their funding requirements.
The latest initiative in bringing in NBFCs into business of Factoring shall play a major role in bridging the gap and enabling Indian firms push forward into 2022 in the current context, when access to finance is critical for jump-starting economic growth. This liberalized approach to factoring shall relieve strain on lending institutions, resulting in more financing available to small and micro firms. This is a step in the right direction to assist businesses in recovering from the present pandemic-related problems. As we move into the next decade, improved finance availability will aid Indian enterprises in achieving consistent economic growth , thereby offering a great opportunity to all constituents world-over in factoring chain.
About our Member MNS Credit Management Group
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