Government approves Credit Guarantee Funds for Factoring for MSME

NEW DELHI: The Cabinet today cleared a proposal for setting up of a Rs 500-crore 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.

"The corpus of the fund is Rs 500 crore. Assuming a leverage of five times of the corpus, gross factoring transactions would cover Rs 20,000 crore per annum at the end of fifth year," an official statement said after a meeting of the Cabinet chaired by Prime Minister Narendra Modi.

The corpus is estimated to be Rs 492 crore at the end of fifth year, it said, adding, in the third year of operations, a mid-term review of the fund may be undertaken and propose modifications.

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

According to the statement, the Department of Financial Services (DFS) will be "the Settlor" and will establish a Fund for guaranteeing factored debts.

"The Fund should be under "National Credit Guarantee Trustee Company ( NCGTC). It 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. The Management Committee shall be responsible for all policy aspects of the Fund," it said.

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, it said.

The actual interest rate to be charged from the MSMEs will be left to Factors, it said.

"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," it added.