Friday, August 14, 2015

Banks can conduct Factoring

The Reserve Bank of India permitted banks to carry out the business of factoring departmentally,
without obtaining its prior approval, subject to conditions.

What is Factoring ?
When a bank undertakes factoring, an enterprise sells its accounts receivable (invoices) to the bank
at a discount. Later, the bank recovers money from the buyer on the maturity date of the invoices.

Comprehensive Policy
The RBI said banks may formulate a comprehensive factoring services policy with the approval of their Boards and offer the services to their customers in accordance with this policy. Factoring services may be provided either with recourse or without recourse or on limited recourse basis. These services should be extended in respect of invoices which represent genuine trade transactions.
The pre-payment amount offered by banks for the receivables acquired under factoring should
not exceed 80 per cent of the invoice value.

Upper Cap
Investment of a bank in the shares of factoring companies inclusive of its subsidiary carrying on factoring business will not, in the aggregate, exceed 10 per cent of the paid up capital and
reserves of the bank.

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