A recent press report said that a Parliamentary panel wants the Reserve Bank of India (RBI) to frame guidelines on pricing of factoring services in order to prevent any “exploitative practices” by ‘factors’. It also wants the rates charged by ‘factors’ not be higher than those charged by banks for receivable financing.
These suggestions form part of the Standing Committee on Finance’s report on the Factoring Regulation Bill, 2011 and it was report in the Lok Sabha.
Factoring is a financial transaction where a business sells its accounts receivable to a third party called ‘factor’, which undertakes the activity of financing the receivables, administration of debt and collection of debt.
The House Panel headed by Mr. Yashwant Sinha is of the view that pricing of factoring services cannot go unregulated as it could affect micro, small and medium enterprises (MSMEs), which may be compelled to sell their receivables at a steep discount to the factors.
The Standing Committee’s suggestion is in sharp contrast to the Finance Ministry’s stance that the RBI cannot be asked to administratively determine the rates of commission or discount charged by the factor to the assignor (MSME).
The Finance Ministry had in its submissions told the Standing Committee that the RBI had moved away from administered rate of interest regime for financial products and any suggestion to administratively determine the rates would not be in line with the existing policy.
The Government is also likely to exempt factoring transactions from stamp duty by moving an amendment to the Indian Stamp Act, 1899 through a schedule to the present Factoring Regulation Bill. An indication to this effect was given to the House Panel by the Finance Ministry through their written submissions.
The RBI has recently hiked lending rates by 25 bps which is likely to make all retails loans (home loan, personal loan, car loan etc) and other loans costlier to the borrowers.