With the view to increase liquidity support to the Micro, Small and Medium Enterprises (MSME) sector, the Reserve Bank of India has included factoring transactions under priority sector lending.
“To increase liquidity support for the MSME sector, it has been decided that factoring transactions on ‘with recourse’ basis shall be eligible for priority sector classification by banks, which are carrying out the business of factoring departmentally. The factoring transactions taking place through TReDS shall also be eligible for classification under priority sector upon operationalization of the platform,” RBI said in a notification.
Factoring is a type of financial transaction and debtor finance in which a business sells its invoices to a third party, called a factor, at a discount.
The notification further said that banks may classify their outstanding factoring portfolio on the reporting dates under certain MSME category.
Further it said that the ‘factors’ must ensure to intimate the limits sanctioned to the borrower to the concerned banks and details of debts factored taking responsibility to avoid double financing.
TReDS is an exchange-based trading platform to facilitate financing of bills raised by such small entities to corporate and other buyers, including government departments and PSUs, by way of discounting.