India’s Factoring Evolution: A Regulatory-Led Growth Story
Written by: Dr. Ravi Modani, Founder & CEO, 121 Finance, India's Largest Digital NBFC-Factor | Board Member, Factors Association of India
India’s factoring industry, though relatively nascent compared to its global counterparts, is currently undergoing a profound transformation. Propelled by significant legislative milestones and a rapidly expanding digital infrastructure, the sector is steadily addressing the persistent challenge of delayed payments and providing crucial alternative short-term working capital solutions—particularly for Micro, Small and Medium Enterprises (MSMEs), often referred to as Small and Medium Businesses (SMBs) in the U.S.
Globally, the factoring landscape presents diverse models. The United States boasts one of the most mature and varied factoring markets, with annual factoring volumes exceeding $100 billion. Europe, on the other hand, surpasses $2.8 trillion, its success largely attributable to a harmonized legal framework, robust integration between banks and factors, and the widespread adoption of non-recourse and export factoring, frequently bolstered by credit insurance.
India, in contrast, is carving its own unique path, strategically leveraging its burgeoning technological advancements, comprehensive Digital Public Infrastructure (DPI), and a meticulously crafted regulatory framework.
Deep-Rooted Legal and Regulatory Framework: A Journey of Evolution
India's regulatory journey for factoring reflects an evolutionary approach, drawing insights from both European and U.S. models while adapting them to local realities. The early 1990s through 2007 marked an era characterized by a contract-driven approach, devoid of specific factoring regulations. This period coincided with India's post-liberalization economic boom, heavily focused on exports. Consequently, the market saw the emergence of export-factoring-led models, with institutions like EXIM Bank of India, FIM Bank, and HSBC Bank, alongside various exporters, establishing factoring operations.
However, the global economic crisis of 2008 had a significant impact, and India was not immune. In response, the Government of India initiated a shift towards a fully regulated factoring market. This culminated in the introduction of the Factoring Regulation Act, 2011, which was formally notified in 2012. The Reserve Bank of India (RBI) was subsequently mandated to bring factoring under its purview as a regulated lending activity.
This landmark legislation was arguably the first dedicated law for factoring anywhere in the world. The RBI, in turn, introduced a new category of licensed non-bank entities known as Non-Banking Financial Company-Factors (NBFC-Factors). Post-2012, only banks or licensed NBFC-Factors were permitted to conduct factoring business in India.
This regulatory shift had dual implications.
On one hand, NBFC-Factors gained the legitimate power of a lending company, including access to and reporting capabilities for all major credit bureaus (such as Transunion, CRIF, Experian, and Equifax). They were also required to report all transactions to the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), akin to the Uniform Commercial Code (UCC) Article 9 reforms in the U.S.
On the other hand, these entities were mandated to maintain at least 75% (later revised to the current 50%) of their total income and assets from factoring activities.
Furthermore, they had to adhere to all prudential norms applicable to lending institutions, including maintaining Risk-Weighted Assets, making provisions for bad debts, and upholding a Capital Adequacy Ratio (CAR) of 15%. Obtaining an additional Authorized Dealer License was also necessary for engaging in export factoring.
What were the consequences of these stringent regulations?
They effectively created significant entry barriers, leading to a highly regulated market with only a handful of players. Predominantly, these were subsidiaries of large banks like State Bank of India or Canara Bank, or international entities like FIM Bank Malta. The market saw little interest from new entrants perceiving factoring as a viable lending product. Concurrently, India achieved self-sufficiency in foreign exchange reserves, and exporters gained access to multiple, cheaper financing options, leading to a near collapse of the export factoring market.
While the regulations brought banks on par with NBFC-Factors, banks, despite their advantage in the cost of funds, found the high operational expenditure inherent in factoring a deterrent. They largely continued to engage in corporate factoring, typically housed within their treasury or trade finance departments, often characterized by minimal risk and exceedingly low yields.
The impetus for the third and current phase of factoring in India began in 2018 when the government appointed a specialized committee for MSME reforms. This committee not only recommended greater flexibility for factoring but also advocated for opening up the credit insurance market to NBFC-Factors in India.
Around the same time, the UK also passed the Business Contract Terms (Assignment of Receivables) Regulations 2018, signaling a global trend towards modernizing receivables financing.
Responding swiftly, the Indian Parliament passed the Factoring Regulation (Amendment) Act, 2021.
The RBI followed suit with more accommodating guidelines, carefully designed not to disrupt the core regulatory framework.
These included the Registration of Factors (Reserve Bank) Regulations, 2022, and
the Registration of Assignment of Receivables (Reserve Bank) Regulations, 2022.
Complementing these, the insurance regulator issued the IRDAI (Trade Credit Insurance) Guidelines, 2021.
These reforms significantly broadened the scope of factoring to include lease rent receivables, toll receivables, and even insurance-backed receivables from MSME buyers.
Today, India's factoring framework stands as a more regulated system than that of the U.S., yet it is arguably more technologically advanced than the European system, with DPI serving as a key differentiator.
This enhanced regulatory and technological ecosystem is poised to offset the challenges posed by the sheer size and complexity of the Indian market.
India's overarching regulatory philosophy for its financial systems has consistently been evolutionary, rooted in the core belief that robust regulations are indispensable for building a resilient financial architecture.
Technology: The Fourth Actor in Factoring
A truly comprehensive factoring company effectively subsumes the functions of multiple entities: payments, collections, trading, lending, accounting, and underwriting. In today's interconnected world, technology serves as the most common thread binding these disparate functions. Unlike Europe, where factoring often relies on established bilateral relationships and trust, India’s rapidly evolving ecosystem is increasingly data-rich and digitally verifiable, making it exceptionally well-suited for transparent and scalable factoring operations.
A pivotal development was the launch of GSTN (Goods & Service Tax Network) in 2017. At that time, it was arguably the only system globally for real-time input/output matching of claims across the entire indirect tax chain (akin to VAT). This innovation effectively eliminated one of the biggest pain points in factoring worldwide: fraudulent invoices.
The Digital Public Infrastructure (DPI) developed in India, encompassing real-time systems for payments, transactions, goods movement, vehicle movement, and e-invoicing, all equipped with protective guardrails for fintechs, has become the cornerstone of this foundation.
This was further augmented by the introduction of TReDS (Trade Receivables Discounting System) platforms in 2018. Operating under the Payment & Settlement Systems Act, 2007, TReDS platforms are specifically designed for reverse factoring. The government has mandated all buyers with a turnover exceeding US30million(reducedfromUS60 million) to compulsorily register on these platforms, while sellers are restricted to MSMEs. Furthermore, the government incentivized banks to bid for reverse factoring transactions on TReDS, offering the benefit of non-recourse to sellers and qualifying these transactions for their Priority Sector Lending norms. This initiative has seen rapid growth and is projected to contribute factoring volumes of approximately US$30 billion by the end of FY26.
Institutional Pillars: CERSAI, Credit Bureaus & GSTN
India’s regulatory infrastructure provides robust support for factoring through several integrated national systems:
GSTN (Goods and Services Tax Network): This integration allows factors to digitally verify invoices against real-time tax records, offering an unprecedented level of transparency and enabling a more accurate assessment of cash flow consistency and invoice authenticity.
Credit Bureaus: Institutions like CIBIL and CRIF now share comprehensive commercial data, significantly enhancing factors' ability to conduct thorough underwriting and implement robust fraud prevention checks.
CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India): CERSAI ensures the legal priority of assignments and acts as a crucial safeguard against duplicate financing of invoices, providing a centralized and verifiable record of all secured transactions.
Future of Factoring Finance in India
These comprehensive reforms have fundamentally transformed India’s factoring landscape, elevating it from a niche financial product to a scalable, accessible credit mechanism vital for MSMEs.
While the U.S. model has historically been largely market-driven, India’s journey has been distinctly regulatory-led—a necessary approach perhaps, in a complex, credit-starved economy. That said, the ultimate goals of fostering economic growth and supporting businesses remain remarkably similar.
India’s factoring industry stands at a significant inflection point. Bolstered by robust legislation, digitally integrated invoice ecosystems, and increasing participation from NBFC-Factors, the sector is primed for substantial growth.
For global factoring players and financial institutions, the Indian experience offers a compelling case study in how strategic legal reform combined with pioneering digital infrastructure can unlock immense trade finance potential within emerging markets.
About the Author
Dr. Ravi Modani is a third-generation entrepreneur that has built his career at the intersection of Accounts, Business, and Compliance. Immersed in system-driven enterprises from an early age, he learned that trust and transparency are the foundations of long-term success. Holding a Doctorate in Working Capital Management, he emphasizes the importance of distinguishing short- and long-term funds, their roles, and the timing critical to sustainability.
To address challenges in trade finance, Dr. Modani founded 121 Finance with the mission of simplifying B2B Trade Credit Finance and bringing structure, accessibility, and innovation to the unorganized working capital space. His professional journey spans businesses across multiple countries, with a network reaching 32 nations. Guided by the belief that “MSME – My Sweat is My Equity,” he champions tech-driven innovation to help small businesses access seamless working capital. Under his leadership, 121 Finance is redefining factoring in India by enabling instant, 24/7, fully automated invoice-to-cash solutions. This vision has earned recognition such as Tally’s “MSME Digital Transformer” award and accolades from other esteemed institutions. Dr. Modani is also currently serving as a board member of Factors Association of India.
Beyond his entrepreneurial work, Dr. Modani is an avid reader, photography enthusiast, and explorer of behavioral economics.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.