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Introduction
Factoring, the sale of trade receivables for immediate cash, has become an important tool for improving liquidity among India's micro, small, and medium enterprises ("MSMEs"). In this arrangement, a business (the "assignor") sells its receivables-amounts due from a 'debtor' under a supply or service contract - to a third party called a 'factor'. The factor provides upfront financing and later collects payment directly from the debtor when due.
In recent years, factoring has transitioned from a niche activity to a mainstream financing option, driven by the need to formalise trade credit and strengthen MSME working capital. Recognizing its importance, the Indian legislature and the Reserve Bank of India ("RBI) have established a detailed regulatory framework for the factoring business in India. The Factoring Regulation Act, 2011 ("FRA 2011") serves as the foundational legislation, while the RBI's 2022 regulations and the Priority Sector Lending (PSL) Master Directions, 2025, operationalise and integrate factoring within the financial system. Together, these instruments establish a cohesive and growth-oriented regime for factoring in India. This article analyzes the legal regime for factoring business in India, focusing on the FRA 2011, some key RBI regulations and RBI's Priority Sector Lending (PSL) Master Directions, 2025, to the extent applicable to the factoring transactions.
The Factoring Regulation Act, 2011 – The Legislative Core
The FRA 2011 forms the backbone of India's factoring framework. Section 3 of FRA 2011 mandates that no entity may conduct factoring business without obtaining registration from the RBI, thereby ensuring regulatory oversight. Section 5, however, exempts banks, statutory corporations, and government companies from this requirement.
Sections 7 to 18 codify the legal process of assigning receivables, including the requirement of a written agreement, the obligation to notify debtors, and the preservation of debtor defences. Section 19 of FRA 2011 introduces a key transparency mechanism by requiring the registration of all assignments with the Central Registry of Securitisation, Asset Reconstruction, and Security Interest of India ("CERSAI"). Section 19(1A) further provides that when receivables are financed through a Trade Receivables Discounting System (TReDS) platform, the platform itself must file the particulars on behalf of the factor.
An important fiscal facilitation under the FRA 2011 is the stamp duty exemption. Section 35 and the accompanying Schedule of FRA 2011 amend the Indian Stamp Act, 1899 to insert Section 8D, which provides that any document executed for the assignment of receivables in favour of a factor shall not attract stamp duty. This measure substantially lowers transaction costs and demonstrates the legislative intent to promote factoring as a cost-effective and accessible financing avenue.
RBI's 2022 Regulations – Expanding the Factoring Ecosystem
To operationalise the FRA 2011 and broaden market participation, the RBI introduced two sets of regulations in January 2022: (a) the Registration of Factors Regulations, 2022; and (b) the Registration of Assignment of Receivables Regulations, 2022.
The Registration of Factors Regulations, 2022, require every NBFC-Factor to maintain a minimum Net Owned Fund (NOF) of five crore rupees and to satisfy the Principal Business Criteria, which stipulates that at least fifty percent of assets and income must arise from factoring. This criteria ensure financial strength and focus among participating entities. Existing NBFC-Investment and Credit Companies (NBFC-ICCs) are permitted to apply for conversion into NBFC-Factors, thereby widening institutional participation. Banks, by virtue of Section 5 of the FRA 2011, remain exempt from separate registration.
The Registration of Assignment of Receivables Regulations, 2022 implement Section 19(1A) of the FRA 2011. These regulations require TReDS platforms to file Form I within ten days of an assignment and Form II upon full realisation of receivables. Late filings are permitted with the payment of additional fees. This procedural clarity ensures the creation of an auditable and transparent record of receivable ownership.
Taken together, the 2022 regulations strengthen compliance, facilitate the entry of new NBFC participants, and enhance traceability in factoring transactions.
Factoring by Banks – RBI Directions and Exemptions
While banks are exempt from separate registration under the FRA 2011, their factoring operations are regulated by the RBI (Financial Services Provided by Banks) Directions, 2016. Clause 10 of such directions authorises banks to undertake factoring with recourse, without recourse, or on a limited recourse basis.
Under these directions, banks must establish board-approved limits for 'without-recourse' exposures and obtain borrower certificates confirming that the same receivables are not being financed elsewhere. For prudential purposes, exposures in 'with-recourse' factoring are treated as exposure to the assignor, whereas exposures in 'without-recourse' factoring are treated as exposure to the debtor. These distinctions align factoring with the broader credit risk management and capital provisioning framework applicable to loans and advances.
Through this integration, the RBI ensures that factoring activities conducted by banks remain within the ambit of regulated credit operations, thereby maintaining systemic stability while allowing flexibility in product design.
Factoring under Priority Sector Lending – Policy Alignment for MSME Growth
The inclusion of factoring in the RBI's Priority Sector Lending (PSL) Master Directions, 2025 marks an important policy development. Clause 10.1 of the aforesaid directions recognises factoring transactions as eligible priority sector credit if the assignor is an MSME. This recognition extends to 'with-recourse' factoring: (a) undertaken directly by the banks; and (b) where the receivables have been assigned through RBI-approved TReDS platforms.
This policy alignment serves two major objectives. First, it provides a clear incentive for banks to extend factoring-based credit to MSMEs, a sector often constrained by delayed receivables and limited access to working capital. Second, it reinforces the government's broader strategy to formalise MSME trade credit and enhances liquidity support for such MSMEs. By embedding factoring within the PSL framework, the RBI has positioned it as a mainstream credit channel that advances both financial inclusion and economic resilience.
Documentation and Risk Allocation in Factoring Transactions
The success of a factoring transaction depends heavily on well-structured documentation. The first aspect is risk allocation, which defines whether the factor's exposure is on the assignor in 'with-recourse' transactions or on the debtor in 'without-recourse' transactions. This classification affects not only the commercial arrangement but also regulatory provisioning and accounting treatment.
The formalities of assignment must also be strictly observed. It is always advisable to serve proper written notice(s) under Section 8 of the FRA 2011 on the relevant debtor(s) for each tranche of assignment of receivables. Each such tranche of the assignment of receivables must be filed/ registered with CERSAI in accordance with Section 19 of the FRA within stipulated timelines, and satisfactions must be duly recorded once receivables are realised. Where factoring is conducted via TReDS, the factor must ensure that platform filings are completed accurately and within prescribed timelines.
Controls against double financing are equally important. The assignor should represent that the receivables are genuine, unencumbered, and not otherwise assigned. The documentation should include trust provisions for misdirected payments and specify clear instructions for payment flows and collection accounts.
Factors must also protect themselves against debtor defences and dilution risks. In 'without-recourse' transactions, the factor assumes credit risk on the debtor but should not bear risks arising from the seller's performance or administrative errors. Accordingly, the documentation typically includes assignor indemnities covering fraudulent invoices, disputes, credit notes, and other dilution events. Recourse and repurchase triggers should be defined to address fraud, breach, or eligibility failures.
Finally, corporate and contractual authority must be clearly documented. Assignors should furnish certificates, corporate authorizations / powers of attorney confirming their capacity to assign receivables.
Conclusion
India's regulatory landscape for factoring has evolved into a mature and coherent system that combines legislative clarity with regulatory precision. The Factoring Regulation Act, 2011 provides the legal foundation, establishing essential safeguards such as registration of assignment of receivables, and stamp duty exemptions. The RBI's 2022 regulations operationalise these principles, enhancing procedural transparency and facilitating greater participation by NBFCs. The integration of factoring into the Priority Sector Lending framework through the 2025 Directions further aligns commercial finance with national policy priorities.
Together, these reforms have made factoring a practical and scalable financing solution for MSMEs, reducing transaction costs, improving liquidity, and broadening access to credit. If compliance discipline - particularly in relation to CERSAI and TReDS filings continues to strengthen, factoring in India is well positioned to evolve from a specialised financing product into a mainstream working capital tool supporting sustainable MSME growth and financial inclusion.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
