RBI revises norms for NBFC factor firms

MUMBAI: The Reserve Bank today revised guidelines for NBFC factor companies stipulating that there should be board approved limit for underwriting commitments with a view to mitigate credit risk.

Besides, the RBI has also raised threshold for reporting of frauds from Rs 25 lakh to Rs 1 crore for NBFC.

"Factoring services should be extended in respect of invoices which represent genuine trade transactions," RBI said in a notification.

Factoring business is a type of financial service wherein a firm sells its accounts receivable to a factoring company, which then pay discounted value to seller against receivable receipts.

"Since under without recourse factoring transactions, the factor is underwriting the credit risk on the debtor, there should be a clearly laid down board-approved limit for all such underwriting commitments," RBI said in a notification.

"NBFC-Factors should carry out a thorough credit appraisal of the debtors before entering into any factoring arrangement or prior to establishing lines of credit with the export factor," it said.

With regard to NPA classification, it added, in case of factoring on 'with-recourse' basis, the exposure would be reckoned on the assignor.

In case of factoring on 'without-recourse' basis, the exposure would be reckoned on the debtor, irrespective of credit risk cover or protection provided, except in cases of international factoring where the entire credit risk has been assumed by the import factor, it said.

In a separate notification, RBI said it has been decided to revise the threshold for reporting of frauds and submission of quarterly progress reports on frauds to Central Fraud Monitoring Cell, from Rs 25 lakh as on date to Rs 1 crore with immediate effect.

"As regard reporting of frauds and submission of quarterly progress reports on frauds below the revised threshold, NBFCs will have to furnish the same to the Regional Office of Reserve Bank of India, Department of Non-Banking Supervision under whose jurisdiction the Registered Office of the NBFC falls," it added.