How the Factoring Regulation Amendment Bill will revolutionize MSMEs – Explains Praveen Sinha

Praveen Sinha, Founder, PinCap has said that the MSMEs are about to enter the new regime with the passage of the Factoring Regulation (Amendment) Bill, 2020 by the Parliament.

The Parliament recently passed the Factoring Regulation (Amendment) Bill, 2020 to help the micro, small, and medium enterprises (MSME) sector. While delivering her speech, Finance Minister Nirmala Sitharaman had told the Parliament that it is aimed to smoothen the capital cycle and enhancing cash flow for the MSMEs. Interestingly, the Amendment Bill had included many suggestions from the RBI constituted UK Sinha Committee —an expert committee on MSMEs. 

Understanding the Amendment Bill

The Amendment Bill will facilitate access of funds to MSMEs through non-banking financial companies (NBFC). Hence, it is directed towards expending credit facilities and working capital to MSMEs. 

Factoring is a financial transaction that enables the business to sell its receivables to a third party at discount to avail funds. In other words, it is an asset-based lending (ABL) product. Hence, it works as a protection against bad debts, insolvency, and losses. 

The Amendment Bill will widen the scope of the Factoring Regulation Act, 2011, and will empower the RBI to regulate the factoring ecosystem in India. 

The Factoring Regulation Act, 2011 provisioned registration for doing factoring business in India. Interestingly, there were only seven NBFCs across India that acquired the license to conduct factoring business. One amongst them is Gurugram-based PinCap, founded by ex-MD and cofounder of Jabong —Praveen Sinha. 

Also read: What is Factoring? Why is the Factoring Regulation (Amendment) Bill so important?

While commenting on the development, the spokesperson of PinCap, says, “This is a historic development in the history of India. We were one of the only seven NBFCs licensed by the RBI to conduct factoring business. The new Amendment Bill will solve the core problem of delayed payment faced by the MSMEs.”

“I am glad that the Parliament has done this amid the pandemic as several of MSMEs are already facing cash crises. The delayed payment was the main hindrance to the growth of the MSME sector in India. As soon as the Bill becomes the Act, you will get to witness optimistic changes on ground levels,” he adds. 

With the Amendment Bill, in the opinion of experts, there will be a rise in factoring companies, hence the prices will be competitive. With the institutionalization of factoring, expect a smoother cash flow as the customers will respect factors and will pay quickly. It is important to note that as soon as orders are invoiced, cash is released to the business. 

Praveen Sinha, founder of one of the only seven RBI registered NBFCs into factoring business in India —PinCap, says, “What is crucial to note here is the Amendment Bill is doing away with the threshold for NBFCs for conducting factoring business as prescribed under the Factoring Regulation Act, 2011.” He indicated towards the rule that mandates NBFCs’ financial assets in factoring business and its factoring income should be more than fifty percent of the gross assets and net income or more than a threshold prescribed by the RBI.  

Also read: Jabong Co-Founder Praveen Sinha on Startup Investment.