Why the 2021 factoring amendment bill is supposed to benefit MSMEs needs special attention
Credit and financing for MSMEs: First of all, the good news. India is among the fastest growing economies, after the pandemic measured by Bloomberg and the World Bank at 9.2%. Industrial Production (IIP) jumped 29.3% in May 2021. IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) rose to 61.2 in May 2021 but, disappointingly, it fell to 48.1 in June 2021. This post-pandemic growth projection encourages the micro, small and medium enterprises (MSMEs) that make up the business chain. solid sourcing in manufacturing for dream post-processing. 2022 once the cascading effect of the pandemic subsides.
There has also been a plethora of policy changes in the sector with prospects for growth in trade through the instruments provided for it. The 2021 Factoring Amendment Bill approved by Parliament and intended to benefit the MSME sector requires special attention. It basically ignores that the sector is predominantly micro and small with proprietary and partnered companies constituting 98 percent of total businesses, with several of them not registered on EU government or state government MSME portals. . The figures displayed in the public domain are also misleading because there has been no census. Some studies by the OECD, IMF and World Bank have also extrapolated to the MSME census, 2006.
RBI industry data only gives the number of accounts, not the number of businesses – this is also not scientifically separated between manufacturing and services. At least, as the authors of the article rightly concluded, the synchronization of GST data has helped clean the data for units in the trade and services sector. Regarding manufacturing units, although the UK Sinha Committee has called for cash flow based loans, no bank has put in place the architecture required for this. Banks have become adept at giving numbers their bosses want. They invariably put the blame on the system. State Bankers Committee is finding it increasingly difficult to resolve recovery and restructuring issues. The RBI circulars on the sector do not reflect the understanding of the sector at ground level. The RBI naturally acts more as a guardian of the interests of banks than of companies.
A 2018 study on the MSME funding gap in India by the International Finance Corporation (IFC) estimated the aggregate demand for MSME finance in India at around 87.7 trillion rupees ($ 1.18 trillion), comprising a debt request of Rs 69.3 trillion and a requested capital of Rs 18.4 trillion. After excluding companies in financial difficulty, companies that have been operating for less than a year, companies that have been rejected by financial institutions and companies that prefer informal sources of finance, the study estimates the demand for sustainable debt. in the sector at Rs. 36 700 billion.
Factoring and discounting of invoices
Accounts receivable, known as factor, are paid by another entity, known as assignor, are managed by a bank or NBFC registered under the Companies Act. Factoring helps businesses monetize their receivables quickly and resolve cash flow issues easily and on time. The law, as amended in July 2021, extended the scope of the operation to as many as 5,000 NBFCs subject to the following RBI regulations, a jump from just two factors currently in operation – SBI Global Factors and Can Factors, the two subsidiaries of the banks that own them, namely the State Bank of India and Canara Bank – the two public sector banks.
Both factoring companies saw minimalist demand, especially from the MSME sector. In accordance with RBI guidelines, it is mandatory that when the seller downloads the invoice, its acceptance by the buyer is visible on the portal, and if the buyer downloads the invoice, the seller must accept the invoice for factoring.
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After the introduction of the Goods and Services Tax (GST), several banks and NBFCs significantly expanded their bill discount operations to the benefit of MSMEs. GST made it possible to digitally trace and track the transaction between buyer and seller of goods and services. Banks and NBFCs that negotiate such bills charge higher interest rates than normal working capital, although these transactions become the most crucial part of working capital.
Government eMarketplace (GeM) and TReDS are the other two types of electronic activation of bill of exchange transactions where buyers and sellers must register on the associated platforms by paying the required fees. The turnover threshold of Rs 500 crore for dealing on TReDS has been a factor hampering the speed of transactions.
Even under the revised definition of MSME, the small business will have a turnover of Rs 50 crore, and the medium-sized business will have a minimum turnover of Rs 250 crore. In other words, it will only benefit medium sized and corporate borrowers with turnover of Rs 500 crore.
Factoring units after acceptance by the counterparty will be auctioned. Acceptance of the offer will be the closing time of the day (4 p.m.) and payment must take place within one day thereafter normally, and two days outside the cut-off time.. TReDS offers non-recourse financing to SMEs in which if the company delays payment, the bank treats it as a postcode. Thus, both will benefit businesses. The interest amount will be calculated by the portal which offers the flexibility to the buyer or seller to pay it. Since origination invariably takes place on the seller’s side, banks and NBFCs will charge interest up front and not back or the buyer. In addition, this factor mechanism also involves the payment of additional costs. External credit scoring is imperative for factors and TReDS.
Speed is the essence of delivery, whether it’s goods or payments. Such a speed can only be possible when all the data is digitized. All MSEs in the manufacturing sector should be encouraged to go digital. Whatever the turnover, every company must put all of its data on the system and this will allow transparency, accountability and access to the various services that governments are inclined to offer.
B. Yerram Raju is an economist and risk management specialist. He is also the author of the book – The History of Indian MSMEs. The opinions expressed are those of the author.