Final Project

On
Factoring

Submitted By:
Anjney Verma (PGP14009)
Jaideep Poonia (PGP
14074)
Kush Gupta (PGP 14027)

Group 6

Table Of Content

01

Factoring and its Modus Operandi

02

Factoring Scenario in India

03

Factoring in the International Domain

04

Current Gap and Suggestions

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What is Factoring?

Factoring is defined as a continuing legal relationship

between a financial institution (the factor) and a
business concern (the client), selling goods or providing
services to trade customers (the customers) on open
account basis whereby the Factor purchases the clients
book debts (accounts receivables) either with or without
recourse to the client and in relation thereto controls
the credit extended to customers and administers the
sales ledgers.
According to Factoring Act, 2011 the Factoring
Business is the business of acquisition of receivables
of assignor by accepting assignment of such
receivables or financing, whether by way of making
loans or advances or in any other manner against the
security interest over any receivables.
In simple words, factoring is just a financial tool which
involves selling of the trade debts to financial institution
at a discounted rate.

Types of Factoring: There are majorly seven types of

factoring based on the basis of the volume of transaction and
the nature of the business between client and his factor.

Non
Recourse
Factoring

Recourse
Factoring

Advance and
Maturity
Factoring

Old Line
Factoring

Disclosed
Factoring

Undisclosed
Factoring

Cross
Border
Factoring

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Evolution of Factoring

The first use of

this concept
can be traced
back to the
2000 B.C. in
Mesopotamia
where traders
used some
form of
factoring in
their business
deals

In 1600s,
American
colonists seek
advance
payment on
raw materials
like timber,
tobacco and
cotton shipped
across Atlantic
to England.

In 1300s it
started in
England as a
form of
financing for
the clothing
merchants

In the 21st
century, with
the advent of
internet and
cloud based
platforms,
factoring has
become faster
and much more
accessible to
companies of
all sizes.

In the mid1970s and

1980s the high
interest rates
and banking
regulations
made factoring
a much popular
form of
financing

In the early 20th

century, the
garment and
textile
industries
started to use
invoice
factoring as a
way to buy raw
materials

In 1990, major
banks and
financial giants
like GE Capital
and GMAC get
into factoring.
Smaller
factoring
companies
begin targeting
specific
industries

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Modus Operandi
The Client (Seller) sells goods to the Clients customer and prepares
invoice with a notation that debt due on account of this invoice is
assigned to and must be paid to the Factoring Company (Financial
Intermediary).
The Client (Seller) submits invoice copy only with Delivery Challan
showing receipt of goods by clients customer, to the Factoring
Company.
The Factoring Company, after scrutiny of these papers, allows
payment (advance, usually up to 80 percent of the invoice value). The
balance is retained as Retention Money (Margin Money). This is also
called Factor Reserve.
The drawing limit is adjusted on a continuous basis after taking into
account the collection of Factored Debts.
Once the invoice is honoured by the buyer on due date, the Retention
Money credited to the Clients Account.
Till the payment of bills, the Factor follows up the payment and sends
regular statements to the Client.

Group 6

Table Of Content

01

Factoring and its Modus Operandi

02

Factoring Scenario in India

03

Factoring in the International Domain

04

Current Gap and Suggestions

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Indian Scenario
PROBLEMS WITH
ACCEPTANCE

Lack of
awareness

Availability of
better options

Fake Bills

Few Debt
Recovery
platform

Cost of
transaction

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Evolution Of Factoring in India

Major Players

SBI
Glo
bal
Fac
tor
Ltd
.

Can
Bank
Fact
ors

HS
BC

AXI
S

SBI Factor
AXIS

ICIC
I

EC
CG

Number of Services

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IFCI Factors
ICICI
Canbank
Factors
HSBC

Generalized

SIDBI
ECCG

Specialized

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Regulatory Framework

Regulatory Framework

Basic Law of
Transfer of
Receivables

1. Transfer of
Property Act
2. Stamp Laws

Regulatory Statutes

1. Factoring Act,
2011
2. RBIs guidelines
for factoring
companies
3. Basic regulatory
framework for
NBFCs.

Payment Mechanism
and certainty of
payment

1. Negotiable
Instruments Act
2. Payment and
Settlements law
3. MSME law
4. Foreign Exchange
Management, 1999

Group 6

Table Of Content

01

Factoring and its Modus Operandi

02

Factoring Scenario in India

03

Factoring in the International Domain

04

Current Gap and Suggestions

International Regulations

Group 6

International Regulations
In many countries there is no need for authorizations including UK, Czech Republic, The
Netherlands, Poland, Latvia, Slovakia, Switzerland, Luxembourg

USA has no Federal Government supervision but states have varying degrees of
supervision.

Offering credit insurance almost always needs an insurance company license.

Nonrecourse not always treated as insurance.

Full banking license with compliance with Basel rules France Other Regulations

Other authorizations which factoring company may need

1) Anti-money laundering registration and compliance (UK)
2) Data protection registration and compliance (UK)

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Degree of Regulations (Intl.)

Degree of Regulations

Complete government supervision, regulation and licensing of all products and services
(China)

Full banking license issued by national central bank and compliance with Basel II (France)

Registration as a financial institution - unable to take deposits and lesser capital

requirements (many European countries)
No official regulation or supervision at all UK but Self-regulation, complaints
procedure and compensation by national factoring association in UK through Asset Based
Finance Association
Membership of two factor organization such as FCI or IFG: setting standards for business
between members and arbitration of members disputes.

Group 6

Table Of Content

01

Factoring and its Modus Operandi

02

Factoring Services in India

03

Factoring in the International Domain

04

Current Gap and Suggestions

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Gap Identification

Startup Factoring

Quick Cash is a
need for start-ups

Using the
promises by
investors and
clients to get short
term loans

Help PM Modi jis

dream of Startup
India

Will invite policies

to protect the
interest of startups

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Suggestions

Sufficient scope for new players to enter the market

Services should be offered to all industries in each sector

RBI should help Factoring service providing NBFC to raise funds

3
4
5
6
7

Better policies and legislation

Education about the services

Setting up of more credit rating agencies

Proper linkage between Banks and Factors

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