Reserve Bank of India Issues New Regulations for Registration of Factoring Businesses

The Reserve Bank of India (RBI) recently issued the Registration of Factors (Reserve Bank) Regulations, 2022, a significant notification aimed at streamlining the registration process for companies engaged in factoring business. Published in the Official Gazette on January 17, 2022, the regulations came into force on the date of their publication. These regulations were enacted by the Reserve Bank of India (Department of Regulation) in Mumbai on January 14, 2022, exercising powers conferred by section 3 read with Section 31A of the Factoring Regulation Act, 2011 (12 of 2012). The primary purpose of this instrument is to establish the specific manner for granting Certificates of Registration (CoR) to companies proposing to undertake factoring activities.

Under the new framework, a "Non-Banking Financial Company - Factor (NBFC-Factor)" is defined as a non-banking financial company whose principal business, as per these regulations, involves factoring and which has been granted a CoR under section 3 of the Factoring Regulation Act, 2011. To qualify for registration as an NBFC-Factor, a company must maintain a minimum Net Owned Fund (NOF) of ₹5 crore, or such other amount as the Reserve Bank may specify from time to time. Furthermore, the regulations introduce a Principal Business Criteria (PBC), stipulating that an NBFC-Factor must ensure its financial assets in the factoring business constitute at least fifty per cent of its total assets, and its income derived from factoring business must not be less than fifty per cent of its gross income.

The regulations detail the application process for registration. Any company intending to commence factoring business is required to apply to the Reserve Bank for a CoR as an NBFC-Factor, ensuring compliance with the stipulated Principal Business Criteria. Existing Non-Banking Financial Company - Investment and Credit Companies (NBFC-ICCs) that wish to undertake factoring business may also apply for a CoR if they meet specific eligibility criteria, including not accepting or holding public deposits, possessing total assets of ₹1,000 crore and above as per their last audited balance sheet, meeting the prescribed NOF requirement, and demonstrating regulatory compliance. NBFC-ICCs that do not meet these conditions but still intend to engage in factoring must approach the Reserve Bank for conversion to an NBFC-Factor, adhering to the PBC. Such conversion applications necessitate the submission of all supporting documents required for new registration, along with the surrender of the original CoR issued to the NBFC-ICC under Section 45IA of the Reserve Bank of India Act, 1934. The regulations also clarify that certain entities, such as banks, body corporates established under an Act of Parliament or State Legislature, or Government Companies, may conduct factoring business without requiring registration under these specific RBI regulations, as per Section 5 of the Factoring Regulation Act, 2011. Once a CoR is granted, an NBFC-Factor or eligible NBFC-ICC must commence its factoring business within six months from the date of the grant.

The legislative intent behind these regulations is to provide a clear and robust regulatory framework for the factoring sector, particularly for non-banking financial companies. The earlier legal position, while governed by the Factoring Regulation Act, 2011, necessitated detailed operational guidelines for the registration and conduct of factoring entities. These regulations address statutory gaps by specifying eligibility criteria, capital requirements, and business composition thresholds, thereby ensuring that only financially sound and appropriately focused entities engage in factoring. The legislation provided: “In exercise of the powers conferred by section 3 read with Section 31A of the Factoring Regulation Act, 2011 (12 of 2012), the Reserve Bank of India, hereby makes the following regulations pertaining to the manner of granting Certificate of Registration to companies which propose to do factoring business.” This statement underscores the policy rationale to formalize and regulate the entry of players into the factoring market, which is crucial for facilitating credit to micro, small, and medium enterprises (MSMEs) by enabling them to encash their receivables. The regulations introduce new obligations for companies seeking to enter or expand into the factoring business, ensuring greater transparency and stability within the financial system. Furthermore, they mandate that NBFC-Factors and eligible NBFC-ICCs conduct their business in strict accordance with the Factoring Regulation Act, 2011, and all rules, regulations, directions, and guidelines issued by the Reserve Bank, thereby establishing a clear enforcement mechanism for ongoing compliance and prudential oversight.

Keywords: RBI, Factoring, Regulations, NBFC-Factor, Registration, Net Owned Fund, Principal Business Criteria, Financial Services, India Geo Tags: India, Maharashtra District: Not Applicable