Reserve Bank has included factoring transactions under priority sector lending with an aim to increase cash flow to small and medium enterprises.
"To increase liquidity support for the MSME sector, it has been decided that factoring transactions on ‘with recourse’ basis shall be eligible for priority sector classification by banks, which are carrying out the business of factoring departmentally," RBI said in a notification.
Factoring is a type of financial transaction and debtor finance in which a business sells its invoices to a third party, called a factor, at a discount.
Companies sometimes factor their receivable assets to meet their immediate cash needs.
RBI said the factoring transactions taking place through TReDS shall also be eligible for classification under priority sector upon operationalisation of the platform.
TReDS is an exchange-based trading platform to facilitate financing of bills raised by such small entities to corporate and other buyers, including government departments and PSUs, by way of discounting.