The Union Cabinet chaired by the Prime Minister, Shri Narendra Modi, gave its approval to establish a Credit Guarantee Fund for Factoring for MSME units.

The corpus of the Fund is ₹ 500 crore. Assuming a leverage of 5 times of the corpus, gross factoring transactions would cover ₹ 20,000 crore per annum at the end of fifth year. The corpus is estimated to be ₹ 492 crore at the end of fifth year. In third year of operations, a mid-term review of the Fund may be undertaken and propose modifications if any.

The goal is to promote "factoring without recourse". The mechanism would be:

i. Governing structure - DoFS will be "the Settlor" and shall establish a Fund for guaranteeing factored debts. The Fund shall 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.

ii. Coverage - Credit guarantee cover for a maximum of 50 percent 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.

iii. Guarantee Fee - The guarantee fee chargeable from the MLIs shall not exceed 0.75 percent per quarter of the guaranteed factored debts for the amount of guarantee cover.

iv. Filing of claims by factors - Claims shall be filed by MLIs with the proposed Fund, as per guidelines prescribed by the Management Committee.

v. Interest rate - The actual interest rate to be charged from the MSMEs will be left to Factors.

vi. Modifications to the parameters under the scheme - 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.

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 ₹ 20,000 crore. The Factoring Regulation Act, 2012 provides the legal framework for factoring. RBI has issued guidelines. However, there is no insurance for factoring.

Credit guarantee for factoring expands partial cover for factored receivables, supporting non recourse financing for MSMEs. A centrally sponsored Credit Guarantee Fund for Factoring will provide partial credit cover for eligible factored receivables to promote factoring without recourse. The Fund, to be set up under the National Credit Guarantee Trustee Company with the Department of Financial Services as Settlor, will be governed by a Management Committee responsible for policy, claim guidelines and periodic review; participating factors will pay a capped guarantee fee while retaining discretion over interest charged to MSMEs.