Tag: Innovative Financial Services Mumbai University BMS Notes

Dissatisfied with the old bill market scheme, in February 1970, the Reserve Bank of India constituted a Study Group under the chairmanship of Sh Narasimhan to go into the question of enlarging the use of bills of exchange as an instrument of credit and the creation of genuine bill market in India.

On the recommendations of the report of the study group, the Reserve Bank introduced the New Bill Market Scheme in November 1970 under Section 17 (2) of the Reserve Bank of India Act.

The main features of the New Bill Market Scheme are:

(i) All licensed scheduled commercial banks including the public sector banks will be eligible to offer bills of exchange to the Reserve Bank for rediscounting.

(ii) The bills covered under the scheme must be genuine trade bills relating to the sale or dispatch of goods.

(iii) The Reserve Bank rediscounts these bills. That is why the scheme is also called ‘Bills Rediscounting Scheme’. The rediscounting facility should be available at the Reserve Bank’s offices at Bombay, Calcutta, Madras and New Delhi. To avoid rediscounting of large number of small bills, such bills should be given in bunches.

(iv) The bill should be drawn on and accepted by the purchaser’s bank. If the purchaser’s bank is not a licensed scheduled bank, the bill should in addition bear the signatures of a licensed scheduled bank.

(v) The bills should have maximum of 90 days.

(vi) The bills should bear at least two good signatures.

(vii) The scheme does not cover the bills of exchange relating to the sale of goods to the government departments and quasi-government bodies as well as to statutory corporations to the sale of such commodities which are indicated by the Reserve Bank from time to time.

(viii) According to the modification of the scheme in 1971, the bills of exchange relating to the sale of goods to government departments and quasi government bodies as well as to statutory corporations have also been covered by the scheme.

(ix) With effect from April 1972, the bills of exchange drawn and accepted by the Industrial Credit and Investment Corporation of India (ICICI) were also made eligible for discount under the scheme.

New Bill Market Scheme:

Dissatisfied with the old bill market scheme, in February 1970, the Reserve Bank of India constituted a Study Group under the chairmanship of Sh Narasimhan to go into the question of enlarging the use of bills of exchange as an instrument of credit and the creation of genuine bill market in India.

On the recommendations of the report of the study group, the Reserve Bank introduced the New Bill Market Scheme in November 1970 under Section 17 (2) of the Reserve Bank of India Act.

The main features of the New Bill Market Scheme are:

(i) All licensed scheduled commercial banks including the public sector banks will be eligible to offer bills of exchange to the Reserve Bank for rediscounting.

(ii) The bills covered under the scheme must be genuine trade bills relating to the sale or dispatch of goods.

(iii) The Reserve Bank rediscounts these bills. That is why the scheme is also called ‘Bills Rediscounting Scheme’. The rediscounting facility should be available at the Reserve Bank’s offices at Bombay, Calcutta, Madras and New Delhi. To avoid rediscounting of large number of small bills, such bills should be given in bunches.

(iv) The bill should be drawn on and accepted by the purchaser’s bank. If the purchaser’s bank is not a licensed scheduled bank, the bill should in addition bear the signatures of a licensed scheduled bank.

(v) The bills should have maximum usance of 90 days.

(vi) The bills should bear at least two good signatures.

(vii) The scheme does not cover the bills of exchange relating to the sale of goods to the government departments and quasi-government bodies as well as to statutory corporations to the sale of such commodities which are indicated by the Reserve Bank from time to time.

(viii) According to the modification of the scheme in 1971, the bills of exchange relating to the sale of goods to government departments and quasi government bodies as well as to statutory corporations have also been covered by the scheme.

(ix) With effect from April 1972, the bills of exchange drawn and accepted by the Industrial Credit and Investment Corporation of India (ICICI) were also made eligible for discount under the scheme.

Advantages of Developed Bill Market:

A developed bill market is useful to the borrowers, creditors and to financial and monetary system as a whole. The bill market scheme will go a long way to develop the bill market in the country.

(i) Bill finance is better than cash credit. Bills are self-liquidating and the date of repayment of a bank’s loans through discounting or rediscounting is certain.

(ii) Bills provide greater liquidity to their holders because they can be shifted to others in the market in case of need for cash.

(iii) A developed bill market is also useful to the banks is case of emergency. In the absence of such a market, the banks in need of cash have to depend either on call money market or on the Reserve Bank’s loan window.

(iv) The commercial bill rate is much higher than the treasury bill rate. Thus, the commercial banks and other financial institutions with short-term surplus funds find in bills an attractive source of both liquidity as well as profit.

(v) A development bill market is also useful for the borrowers. The bills are time-bound, can be sold in the market and carry the additional security in the form of acceptor’s signature. Therefore, for the borrowers, the cost of bill finance is lower than that of cash credit.

(vi) A developed bill market makes the monetary system of the country more elastic. Whenever the economy requires more cash, the banks can get the bills rediscounted from the Reserve Bank and thus can increase the money supply.

(vii) Development of the bill market will also make the monetary control measures, as adopted by the Reserve Bank, more effective. As pointed out by the Narasimhan Study Group, “the evolution of the bill market will also make the Bank Rate variation by the Reserve Bank a more effective weapon of monetary control as the impact of any such changes could be transmitted through this sensitive market to the rest of the banking system.”

Defects of Bill Market Scheme:

The bill market scheme is a right step in the right direction. Over the years, the functioning of the scheme has been quite encouraging. The outstanding level of bills rediscounted under the scheme increased considerably from Rs. 10 crore at the end of June 1971 to Rs. 110 crore at the end of March 1980.

But, the scheme has been subjected to criticism due to its various defects:

(i) The scheme has been generally used by the banks and their borrowers to offset the credit control measures of the Reserve bank. Whenever the Reserve Bank tried to control the bank credit without restricting the bill rediscounting facility, the banks increasingly utilised this facility. This made the Reserve Bank’s tight money policy ineffective. As a result, the Reserve Bank was forced first to put restrictions on the bill rediscounting facility, and then to allow the facility wholly on its discretion.

(ii) The bill market scheme has not been successful in developing a genuine bill market. The main reason is that the borrowers as well as the banks still have preference for cash credit and dislike for bill finance.

(iii) The scheme is restricted to banks and some selected financial institutions. It has not been able to cover the indigenous bankers and other constituents of unorganised sector of the Indian money market.

(iv) The scheme has remained mainly concentrated in the fields of industry, trade and commerce. It has not been extended to agricultural sector.

In India, Factoring is subject to the Factoring Regulation Act, 2011 and the RBI Non-Banking Financial Company Factors (Reserve Bank) Directions, 2012. As per the extant laws only certain NBFCs (with atleast 50% of the assets and income representing assets and income from factoring business) or Banks and Gov. bodies can act as factors this resulted in a limited volume of factoring in India, and thus the insignificant global presence. As such the Factoring Regulation (Amendment) Bill, 2020 proposes to widen the scope to all NBFCs along with other proposals to increase factoring volumes in India.

For the Seller

• Reduces the risk of a Working Capital Deficit.
• Positive impact on the balance sheet providing more liquidity and solvency to the company.
• Protects from risk of bad-debt (except in ‘Recourse Factoring’
• Better Administration: The amount of time taken to monitor credit, manage collection and evaluate buyer’s credit worthiness gets saved.

Factoring in India is the selling or discounting of invoices (receivables) by a seller of goods and services, usually micro, small and medium enterprises (MSMEs) to a factoring company or bank. Ideally it should lead to an improvement in collection management, whereby the MSME derives the advantage of realising the receivables quickly against the standard waiting period, which is the usance period of the bill. Large corporates (the buyers) would pay these sellers well after the due dates as per their payment cycle.

These MSMEs play a vital role for the growth of Indian economy, contributing 45 per cent of the industrial output, 40 per cent of exports, 42 million in employment, creating one million jobs every year and producing more than 8000 products for the Indian and international markets. As a result, MSMEs are today exposed to greater opportunities for expansion and diversification across the sectors. The Indian market is growing rapidly and industry is making remarkable progress in various sectors, such as: manufacturing; precision engineering; food processing; pharmaceuticals; textile & garments; retail; IT; agriculture; and service sectors. MSMEs are finding increasing opportunities to enhance their business activities in these core sectors.

One of the key constraints impacting the MSMEs is inadequate finance, particularly working capital. In the case of MSMEs, the need for quick conversion of trade receivables an important component of current assets of their business entities into cash, assumes great importance, since the lack of opportunities affects their liquidity, and thereby their business, quite significantly. It has, however, been observed that, at present, not many avenues exist for these enterprises to convert their receivables before maturity except through availing of a bill finance facility from a bank. One of the principal instruments of working capital is trade finance, including bill discounting and factoring. It is estimated that only 10 per cent of the total receivables market is presently covered under the formal bill discounting mechanism in the financial system, while the rest is covered under conventional cash credit/overdraft arrangements with banks. The MSMEs’ smaller balance sheets and asset quality act as constraint in their ability to avail of banking limits.

Other issues affecting the market environment include weak credit infrastructure and late payment by large buyers. Factoring companies and banks face difficulties in procuring credit information of the buyers, and have to rely largely on self-assessment of these buyers where possible. Late payment has always been an impediment to supplier growth. Most MSMEs can hardly withstand the burden of late payments but still these firms usually extend credit beyond the agreed tenor to accommodate delayed payment, else they can end up losing the buyer’s business. Most of the major corporates, including large public sector enterprises, follow a monthly payment cycle irrespective of the invoice due date. The business orientation of large industries often affects the MSMEs directly, in turn hampering the recycling of funds and business operation of MSME units.

Market Performance and Supply

Letter of credit market share as a trade financing tool is less than 10 per cent of the total country exports, leaving a huge opportunity for open account trade finance. In India, factoring is still to pick up pace, even though it has been around for more than two decades. As per Factors Chain International statistics, 2014 factoring volumes in India stand at around only $5.2 billion, of which $4.2 billion is domestic trade.

Factoring companies in India do offer various types of services depending upon client needs, including recourse and non-recourse factoring, domestic and international factoring, and disclosed and undisclosed factoring. Most deals done in India are with recourse to the corporate, since the factoring company and bank are not able to cover the credit risk on the buyer. This is mainly because credit insurance is not allowed, as per regulations in India, for the purpose of factoring. Thus, there is a need to build a suitable institutional infrastructure which will not only enable an efficient and cost effective factoring and reverse factoring process to be put in place, but also ensure sufficient liquidity is created for all stakeholders through an active secondary market for the same.

In order to address this issue, the Reserve Bank of India (RBI) published a concept paper on ‘Micro, Small & Medium Enterprises (MSME) Factoring-Trade Receivables Exchange’ in 2014. It involved the setting up of an institutional mechanism for financing trade receivable known as a ‘Trade Receivables Discounting System’ (TReDS). The transactions processed under TReDS will be non-recourse to the sellers. TReDS will provide the platform to bring sellers, buyers, and financiers together for facilitating uploading, accepting, discounting, trading, and settlement of MSME invoices. Initially TReDS would facilitate the discounting of these factoring units by the financiers resulting in flow of funds to the MSMEs with final payment of the factoring bill being made by the corporate buyer to the financier on due date. Later on, TReDS would enable further discounting /re-discounting of the discounted factoring units by the financiers, thus resulting in assignment in favour of other financiers. The RBI is expected to release further information on the functioning of the exchange once the TReDS exchange operator is identified.

It is felt by many that things can be done to improve the market opinion and share of factoring in the country, such as: creation of greater awareness, especially among MSMEs, on the benefits of both domestic and export factoring; addressing the liquidity constraints facing factors; factors and regulators simplifying products and transactions; a review of why factoring companies are not allowed to avail of credit insurance; clarification on whether the exemption granted in the Factoring Regulation Act, 2011 overrides existing state stamp laws on assignment; and standardising seller balance sheet treatment with regard to non-recourse factoring.

Future Trends

There have been various measures undertaken recently in trying to address the challenges faced by the factoring industry, and increase the scope for factoring across the country. The Enactment of the Factoring Regulation Act, 2011, was done with the aim of regulating assignment of receivables in favour of factors, and delineating the rights and obligations of parties to assignment of receivables. Broad features of the act include: assignment of debts under factoring being exempted from stamp duty; assignment of debts being provided with legal recognition; and notice of assignment being made mandatory.

In addition to the launch of TReDS, the RBI has introduced factors as a new category of non-banking financial company (NBFC). It has also simplified the eligibility criteria with regard to principal business the NBFC Factor needs to ensure that financial assets in the factoring business constitute at least 50 per cent of its total assets, and that its income derived from factoring business is not less than 50 per cent of its gross income, as against 75 per cent previously. RBI rulings mean factors can now also access credit information from credit bureaus.

In order to facilitate factoring transactions for MSMEs, the government has approved establishment of a Credit Guarantee Fund For Factoring (CGFF), set at  Rs. 500 crores. The credit guarantee for factoring has the advantage of motivating the factors to increase their lending to MSMEs against factored debts by partially sharing their risk, and leading to an increase in actual availability of credit to MSMEs.

Benefit for Corporates

Optimize the working capital by maintaining or extending days payable

If the buyer has a payment term of 30 days with a Micro Small or Medium Enterprise (MSME) then, a buyer can enable early payment to its supplier on TReDS by Factoring or Reverse factoring of invoice. The supplier gets the payment before the due date and the buyer further extends its days payable as per its agreement with the bank. This helps the corporates optimize their working capital availability and regularize their cash flow.

Alternate and efficient funding method for making vendor payments.

Through TReDS, the buyer enables early payment to the supplier without taking any borrowing limits on his books. Here the buyer only needs to confirm the trade transaction uploaded by the vendor on the portal while the vendor gets funding from the financial institution. The transaction is that of a purchase and sale of receivables between the financial institution and the vendor.

Bring down the cost of goods and services purchased

Cost is one of the major components in procuring goods and services from a vendor. Since a corporate helps its suppliers get payment against their invoices before the due date and regularize their cash flows through xchange, the buyer gets the power to negotiate better terms with the supplier while enjoying a more stable supplier base by facilitating their access to competitive financing.

Lower vendor administration costs

This entire transformation cuts processing costs, eliminate discrepancies and optimize the cash flow for smooth operations for large corporates.

Factoring is a financial technique where a specialized firm (factor) purchases from the clients accounts receivables that result from the sales of goods or services to customers. In this way, the customer of the client firm becomes the debtor of the factor and has to fulfil its obligations towards the factor directly.

In a factoring arrangement, there are three parties directly involved namely; the one who sells the invoice (client), the debtor (customer of the seller), and the factor (financial organization).

• Seller of the product or service provider who originates the invoice is called Client and generally is a business firm.
• Debtors or customers of the client are the recipient of the invoice for the goods or services rendered. They promise to pay the balance within the agreed payment terms. They owe the money for the value of goods and services bought from the seller.
• Assignee (the factoring company) or factor is the service provider who purchases the invoice and gives advance payment to business firm.

Factor is thus an intermediary between the seller and buyer. Mechanics of Factoring shown in figure is explained below:

Steps in Factoring Service

• Firstly, the customer places an order with the Client
• Client sends goods and invoice to customer
• Client assigns invoice to factor
• Factor make pre-payment up to 80 % to client
• Factor send statement to customer
• Customer make payment to factor
• Factor makes balance 20% on realisation to client.

Cost:

Flat Rates vs. Variable Fees

Factoring companies typically calculate rates using a variable fee structure. With variable fees, they discount a small percentage (1 to 3 percent) of the invoice for as long as the invoice goes unpaid. So, the longer your customer takes to pay, the more you’ll pay in fees. A factoring company may charge 2% for the first 30 days and 0.5% for every 10 days that the invoice remains unpaid. Fees are often referred to as invoice discounting rates.

Some factoring companies offer a flat fee structure where a one-time fee is charged up front. With a flat fee structure, the fee remains the same no matter how long the invoice remains open. This type of rate structure is common in the trucking industry. Depending on your industry, one or both of these options may be available and can help you control your costs.

Invoice factoring fees also depend on whether you choose a recourse or non-recourse factoring program. Non-recourse factoring poses more risk to the factoring company, so the costs are slightly higher.

Advance Rates

When your company factors invoices, you’ll typically receive a large percentage of the invoice up front and the remainder is held in a reserve until your customers pay the invoice.

Factoring advance rates vary by industry. Industries that are riskier and harder to fund such as medical and construction can expect advance rates between 60% and 80%. Advances for general businesses and staffing companies can be anywhere from 80% to over 90%. Those in the transportation industry typically see the highest advance rates, ranging from 92% to 97%.

We recommend getting quotes from multiple factoring companies to get a good feel of what you should expect to pay for factoring services and to get the lowest invoice factoring fees for your business.

Factoring cost vs. Factoring rate

Businesses that are in the process of choosing a factoring company often focus their negotiation efforts on getting the best the rate. Although a competitive rate is important, it is only one component of your factoring cost.

A better alternative is to focus negotiations on the “Total cost per dollar” of the proposal. This approach helps ensure you pay the lowest amount for each financed dollar. To calculate the total cost per dollar, you need two figures. You need the rate and the factoring advance.

In most cases, you get the best deal by negotiating the lowest possible rate at the highest possible advance. This assumes you are looking for the highest possible advance, which is the case for most business owners. Otherwise, adapt your strategy accordingly.

Factoring is defined as a method of managing book debt, in which a business receives advances against the accounts receivables, from a bank or financial institution (called as a factor). There are three parties to factoring i.e. debtor (the buyer of goods), the client (seller of goods) and the factor (financier). Factoring can be recourse or non-recourse, disclosed or undisclosed.

Forfaiting is a mechanism, in which an exporter surrenders his rights to receive payment against the goods delivered or services rendered to the importer, in exchange for the instant cash payment from a forfaiter. In this way, an exporter can easily turn a credit sale into cash sale, without recourse to him or his forfaiter.

Factoring and Forfaiting:

• Factoring provides only 80% of the invoice. But 100% finance is provided in forfaiting.
• Factoring is both domestic and foreign trade finance. Whereas forfaiting is only financing of foreign trade.
• In factoring, invoice is purchased belonging to the client. Whereas the export bill is purchased in forfaiting.
• Factoring may have recourse to seller in case of default by buyer. But there is no recourse to exporter in forfaiting.
• There is no letter of credit involved in factoring. But there is letter of credit involved in forfaiting.
• Factoring does not provide scope for discounting in the market as only 80% is financed. But forfaiting provides scope for discounting the bill in the market due to 100% finance.
• Factoring may be financing a series of sales involving bulk trading. Only a single shipment is financed under forfaiting.

The financial sector in India had an overall growth of 15%, which has exhibited stability over the last few years although several other markets across the Asian region were going through a turmoil. The development of the system pertaining to the financial sector was the key to the growth of the same. With the opening of the financial market variety of products and services were introduced to suit the need of the customer. The Reserve Bank of India (RBI) played a dynamic role in the growth of the financial sector of India.

Market Size

As of August 2021, AUM managed by the mutual funds industry stood at Rs. 36.59 trillion (US$ 492.77 billion) and the total number of accounts stood at 108.5 million. In May 2021, the mutual fund industry crossed over 10 crore folios. Inflow in India’s mutual fund schemes via systematic investment plan (SIP) were Rs. 96,080 crore (US$ 13.12 billion) in FY21. Equity mutual funds registered a net inflow of Rs. 8.04 trillion (US$ 114.06 billion) by end of December 2019.

As of September 2021, AUM managed by the mutual funds industry stood at Rs. 36.73 trillion (US$ 489.11 billion).

Another crucial component of India’s financial industry is the insurance industry. Insurance industry has been expanding at a fast pace. The total first year premium of life insurance companies reached Rs. 2.59 lakh crore (US$ 36.73 billion) in FY20.

Furthermore, India’s leading bourse, Bombay Stock Exchange (BSE), will set up a joint venture with Ebix Inc to build a robust insurance distribution network in the country through a new distribution exchange platform.

Growth of the Capital Market in India

• The ratio of the transaction was increased with the share ratio and deposit system.
• The removal of the pliable but ill-used forward trading mechanism.
• The introduction of infotech systems in the National Stock Exchange (NSE) in order to cater to the various investors in different locations.
• Privatization of stock exchanges.

Growth in the Insurance sector in India

• With the opening of the market, foreign and private Indian players are keen to convert untapped market potential into opportunities by providing tailor-made products.
• The insurance market is filled up with new players which has led to the introduction of several innovative insurance-based products, value add-ons, and services. Many foreign companies have also entered the arena such as Tokio Marine, Aviva, Allianz, Lombard General, AMP, New York Life, Standard Life, AIG, and Sun Life.
• The competition among the companies has led to aggressive marketing, and distribution techniques.
• The active part of the Insurance Regulatory and Development Authority (IRDA) as a regulatory body has provided to the development of the sector.

Growth of the Venture Capital market in India

• Presently in India there are around 34 national and 2 international SEBI registered venture capital funds.
• The venture capital sector in India is one of the most active in the financial sector inspite of the hindrances by the external set up.

Government Initiatives

• On September 30, 2021, the Reserve Bank of India communicated that the applicable average base rate to be charged by non-banking financial company – micro finance institutions (NBFC-MFIs) to their borrowers for the quarter beginning October 1, 2021, will be 7.95%.
• On September 30, 2021, the IFSC Authority constituted an expert committee to recommend approach towards development of sustainable finance hub and provide road map for the same.
• In August 2021, Prime Minister Mr. Narendra Modi launched e-RUPI, a person and purpose-specific digital payment solution. e-RUPI is a QR code or SMS string-based e-voucher that is sent to the beneficiary’s cell phone. Users of this one-time payment mechanism will be able to redeem the voucher at the service provider without the usage of a card, digital payments app, or internet banking access.
• In July 2021, Rajya Sabha approved the Factoring Regulation (Amendment) Bill in 2020, enabling ~9,000 NBFCs to participate in the factoring market. The bill also gives the central bank the authority to establish guidelines for improved oversight of the US$ 6 billion factoring sector.
• In July 2021, India’s largest commodities derivatives exchange, Multi Commodity Exchange of India Ltd., and European Energy Exchange AG (EEX) signed a memorandum of understanding (MOU) with the goal of knowledge sharing and expertise exchange on electricity derivative products. This MoU will make it easier for the two exchanges to collaborate in areas including knowledge sharing, education and training, and event planning in the field of electricity derivatives.
• The government has approved 100% FDI for insurance intermediaries and increased FDI limit in the insurance sector to 74% from 49% under the Union Budget 2021-22.
• In January 2021, the Central Board of Direct Taxes launched an automated e-portal on the e-filing website of the department to process and receive complaints of tax evasion, foreign undisclosed assets and register complaints against ‘Benami’ properties.

Factoring is a transaction in which the client or borrower sells its book debts to the factor (financial institution) at a discount. Having purchased the receivables the factor finances, money to them after deducting the following:

• An appropriate margin (reserve)
• Interest charges for the financial services
• Commission charges for the supplementary services.

Bill Discounting

Bill Discounting is a process of trading or selling the bill of exchange to the bank or financial institution before it gets matured, at a price which is less than its par value. The discount on the bill of exchange will be based on the remaining time for its maturity and the risk involved in it.

First of all, the bank satisfies himself regarding the credibility of the drawer, before advancing money. Having satisfied with the creditworthiness of the drawer, the bank will grant money after deducting the discounting charges or interest. When the bank purchases the bill for the customer, it becomes the owner of the respective bills. If the customer delays the payment, then he has to pay interest as per prescribed rates.

Further, if the customer defaults payment of the bills, then the borrower shall be liable for the same as well as the bank can exercise pawnee’s rights over the goods supplied to the customer by the borrower.

Differences

Control of Sales Ledger

In factoring, the bank giving credit takes the onus of checking on the sales ledger, control of credit and chasing your clients for paying back. The work of collection and follow up is outsourced to the bank. Whereas bill discounting requires your own accounts team to take care of the sales invoice, follow-ups and the money is paid directly to you.

Size of the Business

Factoring is useful for larger businesses where an entire line-up of client credits have to be managed. Bill discounting might be useful for small businesses where you do not want your clients to deal with your bank/ third party intermediary and give them an impression of your cash flow situations. Also, bills might not be available on a continual basis for discounting.

Client Interaction

In factoring the client settles their payables with the factor (such as a bank). In bill discounting, the client will not really know the involvement of a third party. The transaction happens between banks where the confirming bank or the buyers’ bank does not intimate the seller of the reimbursement instruction but deals with his bank directly to determine the discounting terms.

Company Involvement

Taking factor services allows you to focus on your business and the factor who is an expert in this field can provide a line of credit to you along with collection services. Bill Discounting requires your team to be involved in the entire process of recovery.

Amount Received by the Company

The drawer company (which is the seller) receives the amount minus a small discount immediately in a bill discounting. Factor companies can release the money within 24 hours to the seller and he can get instant liquidity to continue operations. Here the chunk of the invoice face value is paid to the seller called as “Advance Rate”. The remaining of the face value of invoice can be paid once the buyer’s payment is received by the seller’s bank.

Compensation to Bank/Financier

The bank receives discounting charges for the credit and in factoring it charges commission along with interest.

Recourse

Factoring is only under recourse i.e if the customer fails to pay to the financier, the credit has to be paid by the seller. In bill discounting, there are two methods to present the bills to the buyer’s bank with recourse and without recourse.