Page 239 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes 6. A contract of guarantee is a contract, whether oral or written, to perform the promise or
discharge the liability third person in case of his .......................... .

11.7 Factoring

Receivables constitute a significant portion of current assets of firm. But, for investment in
receivables, a firm has to incur certain costs such as costs of financing receivables and costs of
collection from receivables. Further, there is a risk of bad debts also. It is, therefore, very
essential to have a proper control and management of receivables. In fact, maintaining of
receivables poses two types of problems:

1. The problem of raising funds to finance the receivables, and
2. The problems relating to collection, delays and defaults of the receivables.
A small firm may handle the problem of receivables management of its own, but it may not be
possible for a large firm to do so efficiently as it may be exposed to the risk of more and more
bad debts. In such a case, a firm may avail the services of specialised institutions engaged in
receivables management, called factoring firms.
At the instance of RBI a Committee headed by Shri C. S. Kalyan Sundaram went into the aspects
of factoring services in India in 1988, which formed the basis for introduction of factoring
services in India. SBI established, in 1991, a subsidiary-SBI Factors Limited with an authorized
capital of ` 25 crores to undertake factoring services covering the western zone.

11.8 Meaning

Factoring may broadly be defined as the relationship, created an agreement, between the seller
of goods/services and a financial institution called .the factor, whereby the later purchases the
receivables of the former and also controls and administers the receivables of the former.
Factoring may also be defined as a continuous relationship between financial institution (the
factor) and a business concern selling goods and/or providing service (the client) to a trade
customer on an open account basis, whereby the factor purchases the client's book debts (account
receivables) with or without recourse to the client - thereby controlling the credit extended to
the customer and also undertaking to administer the sales ledgers relevant to the transaction.
The term "factoring" has been defined in various countries in different ways due to non-
availability of any uniform codified law. The study group appointed by International Institute
for the Unification of Private Law (UNIDROIT), Rome during 1988 recommended, in simple
words, the definition of factoring as under:
"Factoring means an arrangement between a factor and his client which includes at least two of
the following services to be provided by the factor:
1. Finance
2. Maintenance of accounts
3. Collection of debts
4. Protection against credit risks".

The above definition, however, applies only to factoring in relation to supply of goods and
services in respect of the following:
1. To trade or professional debtors

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