India recently passed crucial bills and amendments to create a progressive environment to enable factoring ecosystem to solve for working capital requirements of MSMEs.
TheSMEIndia, recently hosted a virtual discussion on how the factoring ecosystem can be strengthened with industry experts.
Dr M Narendra, Former CMD, Indian Overseas Bank & Advisor – Enqube Collaborations said, “Overall credit cycle gets reduced when MSMEs get funding for their receivables. When we see the overall volumes, we are far behind other global jurisdictions. There’s scope to improve the space as so far that much attention has not been given to this space and all stakeholders.”
Dr Narendra explained that there’s also the point of recourse. Without recourse, a full fledged finance is being made and that type of credit risk will have to be taken by the financial institutions. Internationally global trade by Indian entities on factoring was backed by Exim Bank and covers provided by ECGC, Dr Narendra added.
To highlight from a policy perspective, Kinjal Sampat. Vice President – Research – GAME (Global Alliance for Mass Entrepreneurs) said, As several committees have made recommendations in the past, with most recommending factoring to happen with RBI oversight. We estimate with inputs of CMIE (Center for Monitoring Indian Economy) – the dues pending to MSMEs that goes beyond 45 days is nearly Rs 15 lakh crore on a conservative estimate.
She highlighted that there’s a systematic pattern to the problem. For micro SMEs, the delay is more than 176 days, for small enterprises it is 112 days and for medium enterprises it is 81 days. In times like these where there are supply chain constraints due to inflated raw material prices, these dues are necessary to be cleared, she explained.
On TReDS, a lot of people have signed up and the transactions are not coming up. We need to look for many solutions and it can’t have one silver bullet, she added.
Ashutosh Taparia, MD – Client Coverage, CredAble, providing liquidity programs for enterprise supply chains, said historically factoring was a product for large corporations only and that’s how the market really evolved.
The main part we have to look at is the trade between two SMEs has to be solved using the factoring ecosystem, Taparia adds.
There are certain challenges like what if independent directors start questioning, penalties being imposed for delays, court cases, etc.
But globally factoring has been the go to product for banks in different markets. The entire ecosystem takes a lot of time.
The second game changer is the trade credit insurance. NBFCs and Banks will underwrite to some extent, bringing in insurers will bolster the appetite to do factoring by a significant degree, Taparia said.