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ARTICLE · 02 DECEMBER 2025

Factoring Regulations In India: A Comprehensive Regulatory Overview

Luthra and Luthra Law Offices India
Luthra and Luthra Law Offices India
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Luthra and Luthra Law Offices India

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Factoring, the sale of trade receivables for immediate cash, has become an important tool for improving liquidity among India's micro, small, and medium enterprises ("MSMEs").

IndiaFinance and Banking
Varun Chauhan
Varun Chauhan
Pranav Dwivedi
Pranav Dwivedi
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Introduction

Factoring, the sale of trade receivables for immediate cash, has become an important tool for improving liquidity among India's micro, small, and medium enterprises ("MSMEs"). In this arrangement, a business (the "assignor") sells its receivables-amounts due from a 'debtor' under a supply or service contract - to a third party called a 'factor'. The factor provides upfront financing and later collects payment directly from the debtor when due.

In recent years, factoring has transitioned from a niche activity to a mainstream financing option, driven by the need to formalise trade credit and strengthen MSME working capital. Recognizing its importance, the Indian legislature and the Reserve Bank of India ("RBI) have established a detailed regulatory framework for the factoring business in India. The Factoring Regulation Act, 2011 ("FRA 2011") serves as the foundational legislation, while the RBI's 2022 regulations and the Priority Sector Lending (PSL)

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