Ketan Gaikwad, CEO & MD, RXIL, delves into the new issues arising from the new regulation:
RBI has recently issued regulations under the amended Factoring Regulation Act, 2011 for NBFCs, which widens the scope of companies that can undertake factoring business. The Act permits TReDS to file the particulars of assignment of receivables transactions with the Central Registry on behalf of the Factors for operational efficiency. All existing non-deposit taking NBFC-Investment and Credit Companies (NBFC-ICCs) with asset size of Rs10 billion & above will now be permitted to undertake factoring business subject to satisfaction of certain conditions. This will increase the number of NBFCs eligible to undertake factoring business significantly from 7 to 182.
Mehul Dani: What is your company’s response to the RBI’s regulations?
Ketan Gaikwad: The response has been positive. Post the amendment of the Factoring Act, RXIL has been in discussions with the major NBFCs for their enrolment/ registration on TReDS platform pending the RBI regulations. We have observed that NBFCs that are now eligible to do the factoring business and the ones that are already in the supply chain business are keen on registering and getting started on the TReDS platforms.
The new guidelines indeed provide clarity on the way forward for factoring business in India. We understand that NBFCs will now be applying for the Certificate of Registration (CoR) with RBI, with a hope that the process for the CoR is fast-tracked so the business can commence in the final quarter of this current financial year itself. Overall, the NBFC ecosystem is happy with the new guidelines that has widened the ambit for financially robust companies to undertake factoring business.
What is the level of preparedness required for this segment of business? How well are you prepared technologically and as a business model?
The noteworthy feature of TReDS is that it does not require any high-end technology support. It is a web-based platform which is accessible and easy to use. In our discussions, we have also come across NBFCs that are interested in an integrated approach which speaks a lot about their readiness with technology and their approach to stay slightly ahead of the curve.
Traditional banks have restrictions with respect to integration with their core systems, process & data flow, etc. NBFCs are more agile on the technology front. There are a number of NBFCs that are technologically sound with a good understanding of factoring and supply chain business, have their own technology or a fintech division to support them with their own supply chain platform, hence very keen on leveraging their supply chain platform and get access to TReDS and factoring business.
There is a high probability of NBFCs easily scaling up their business on the TReDS platform as they do not have any high-end pre-requisites to fulfill. Apart from that, the rate of interest on the TReDS platform is currently at 6.5-7.5%. However, when the NBFCs come onboard, their rate of interest may be slightly higher than what the banks currently offer. They can reach the low-rated corporates in the category of A to -BBB, which is above the investment grade, this is the area where the banks do fall short on risk appetite and liquidity as compared to the demands from high-rated corporates. The NBFCs will definitely bridge the gap of risk and liquidity.
What are the current trends, future prospects and market size of the factoring business?
India ranks very low as far as the factoring business is concerned. Currently there are only 8 companies that have the factoring license in India and the prospect for factoring is immense. Keeping in mind the government of India’s Make in India initiative and making India a preferred destination for manufacturing in turn to realize India’s $5 trillion economy potential, it is the need of the hour to encourage and increase factoring in India as a way of financing. This makes it the right time for the new guidelines that make it a viable solution for NBFCs to have the CoR for factoring. The new guidelines will help boost the market size of factoring in India.
