Govt Approves for Credit Guarantee Fund for factoring for MSMEs

MSMEs have another good news to smile in December. The Union Cabinet chaired by the Prime Minister, Narendra Modi has given its approval to establish a Credit Guarantee Fund for Factoring for MSME units.

“Factoring is a financing arrangement for suppliers by making pre-payments against invoices. This provides liquidity to MSMEs and facilitates collection of receivables.  India's factoring volume is below Rs 20,000 crore,” an official statement said following the cabinet meeting.

The corpus of the Fund is Rs 500 crore. Assuming a leverage of 5 times of the corpus, gross factoring transactions would cover Rs 20,000 crore per annum at the end of fifth year. The corpus is estimated to be Rs 492 crore at the end of fifth year. In the third year of operations, a mid-term review of the Fund may be undertaken and propose modifications if any.

The goal is to promote ‘factoring without recourse’.

On the governing structure, the statement said that the Department of Financial Services (DoFS) will be the Settlor and will establish a Fund for guaranteeing factored debts.

The Fund will be under National Credit Guarantee Trustee Company (NCGTC) which will have a Management Committee consisting of Secretary, DFS as the ex-officio Chairman. The convenor of the Management Committee will be nominated by the Settlor and the Management Committee will be responsible for all policy aspects of the Fund.

In addition, credit guarantee cover for a maximum of 50 per cent of factored debt will be provided under the Fund. To start with, only transactions covered under the Factoring Regulation Act, 2011 are to be included.

Further, the guarantee fee chargeable from the MLIs shall not exceed 0.75 per cent per quarter of the guaranteed factored debts for the amount of guarantee cover.

Claims will be filed by MLIs with the proposed Fund, as per guidelines prescribed by the Management Committee. The actual interest rate to be charged from the MSMEs will be left to Factors.

While the key elements of the structure have been proposed based on very preliminary data in the sector, these may require to be revisited and will be done with the approval of FM, the statement said.

The Factoring Regulation Act, 2012 provides the legal framework for factoring. RBI has issued guidelines. However, there is no insurance for factoring.