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Fresh norms likely to promote factoring soon

Rajalakshmi Menon

MUMBAI, Dec. 5

THE Union Cabinet is expected to clear shortly fresh guidelines governing factoring services. The Ministry of Small-Scale Industries has formulated a draft legislation seeking to remove hurdles to the development of factoring business.

The Ministry, according to sources, has simplified litigation procedures, underlined the importance of the Letter of Disclaimer (LoD) and the Letter of Notification (LoN) to the business, and added incentives to draw more players into it.

The new legislation is also likely to allow factoring without recourse and credit insurance. Currently, the factoring service available is only with recourse.

However, an important deterrent in factoring of stamp duty has not been dealt with in the legislation. Many factoring units compromise on security without going into the process of registering their subject, thus mostly relying on good faith. These units do not have any guarantee under law.

Factoring is a trade finance instrument similar to bills of discount which can be used to obtain finance by offering receivables in exchange.

The issue of LoDs and LoNs was proving to be one of the major dampeners to the development of factoring in the country. Banks consider factors as rivals and refuse to issue LoDs and, likewise, big clients refuse to accept LoNs issued by factors to avoid making payment. Factors also find it difficult to compete with banks in terms of cost of financing.

In 1988, a Reserve Bank of India committee, headed by Mr C.S. Kalyanasundaram, recommended that factoring services be introduced in the country in view of the ``vast scope of business potential'', estimated at around Rs 4,000 crore.

However, the service never really took off in India and the turnover from this business in 1999-00 stood at Rs 1,500 crore.

The limited geographical reach of the factoring units has not helped either. There are only two factors that do a reasonable amount of business and have some kind of a branch network -- SBI Factors with five branches, and Canbank Factors with seven branc hes. The two have a market share of around 45 per cent each, with the balance 10 per cent being shared by Foremost Factors, Wipro Factors and Integrated Factors.