Page 202 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 13: Factoring and Forfeiting

8. The drawee or the acceptor of the bills is in full knowledge of the bank's charge on the Notes
receivables arising from the sale of goods and services.

Factoring

1. Factoring renders all services like maintenance of sales ledger, advisory services, etc. in
addition to the provision of finance.
2. Trade debts are purchased by assignment.
3. Factoring undertakes to collect the bills of the client.
4. Debts purchased for factoring cannot be rediscounted, they can only be refinanced.

5. Factoring may be with or without recourse.
6. Whereas in factoring, bulk is provided against several unpaid trade generated invoices in
batches. It follows the principle of 'whole turnover'.

7. In full factoring services facility is 'off balance sheet' arrangement, as the client company
completes his double entry accounting by crediting the factor for consideration value.
8. Factoring services like 'undisclosed factoring' are confidential in nature i.e. the debtors
are not aware of the arrangements. Thus, the large industrial houses availing such facility
can successfully claim of running business of their own without any outside financial
support.

Similarities

1. Both provide short-term finance.
2. Both get the account receivables discounted which the client would have otherwise received
from the buyer at the end of credit period.

13.4 Rediscounting of Bills

Presently banks purchase/discount/negotiate bills under Letter of Credit (LC) only in respect
of genuine commercial and trade transactions of their borrower constituents who have been
sanctioned regular credit facilities by the banks. Banks could not, therefore, extend fund-based
credit facilities (including bills financing) to a non-constituent borrower or a non-constituent
member of a consortium/multiple banking arrangement.
Further, the practice of drawing bills of exchange claused 'without recourse' and issuing letters
of credit bearing the legend 'without recourse' is discouraged because such notations deprive
the negotiating bank of the right of recourse it has against the drawer under the Negotiable
Instruments Act. Banks therefore, do not open LCs and purchase/discount/negotiate bills bearing
the 'without recourse' clause.
However, Reserve Bank of India (RBI) in notification to banks dated 3rd August 2007 has advised
that:
1. In cases where negotiation of bills drawn under LC is restricted to a particular bank, and
the beneficiary of the LC is not a constituent of that bank, the bank concerned may negotiate
such an LC, subject to the condition that the proceeds will be remitted to the regular
banker of the beneficiary. However, the prohibition regarding negotiation of unrestricted
LCs of non-constituents will continue to be in force.

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