Framework on capital relief and prudential requirements for factoring transactions

International Financial Services Centres Authority (IFSCA), vide Circular No. IFSCA-FCR0ITFS/2/2024-Banking dated July 21, 2026, has announced an important update regarding Framework on Capital Relief and Prudential Requirements for Factoring Transactions.

Key Details of the Update –
• IFSCA has issued a framework clarifying the availability of capital relief for factoring transactions and prescribing prudential norms for Finance Companies and Finance Units undertaking factoring business in the IFSC.
• Applicability: Applicable to all Finance Companies and Finance Units registered under the IFSCA (Finance Company) Regulations, 2021 undertaking factoring business in the IFSC.
• Finance Companies obtaining eligible credit protection through credit insurance or guarantees may avail capital relief by assigning the covered portion of the factoring exposure the risk weight of the eligible protection provider, subject to prescribed conditions.
• Eligible protection providers include sovereign entities, Export Credit Agencies, Public Sector Enterprises, Multilateral Development Banks, banks, securities firms and other prudentially regulated financial institutions, including insurance companies and import factors.
• Credit insurance or guarantee arrangements must satisfy specified qualifying conditions, including being irrevocable, explicitly documented, linked to identifiable exposures and enforceable without requiring prior legal action against the underlying counterparty.
• Finance Units may claim capital relief only where such relief is recognised by the home regulator of their parent entity, supported by an undertaking at the time of registration.
• Capital relief shall be available irrespective of whether factoring transactions are undertaken through the ITFS platform or independently.
• The Circular prescribes exposure recognition norms for with-recourse, without-recourse, two-factor model and trade credit insurance-based factoring transactions for the purpose of exposure ceilings.
• Receivables remaining unpaid for more than 90 days past the due date shall be treated as Non-Performing Assets (NPAs). For Finance Companies with assets below USD 150 million, the NPA recognition period shall be 180 days. For Finance Units below USD 150 million, the applicable period shall be the lower of the home regulator's prescribed period or 180 days.
• Finance Companies and Finance Units undertaking without-recourse factoring must have Board-approved underwriting limits for such credit risk exposures.
• Effective Date: The Circular comes into force with immediate effect from July 21, 2026.
• Penalty/Consequence: No explicit penalty has been prescribed.

Actions if Any –
• Finance Companies and Finance Units undertaking factoring business should align their capital adequacy and prudential practices with the framework.
• Finance Units seeking capital relief should ensure that the required undertaking from the parent entity regarding recognition by the home regulator is furnished.
• Finance Companies and Finance Units should ensure compliance with the prescribed exposure recognition, NPA classification and provisioning requirements.
• Finance Companies and Finance Units undertaking without-recourse factoring should maintain Board-approved underwriting limits.

Compliance Deadline –
• Immediate – The framework is effective from July 21, 2026, and applicable entities are required to comply from the date of the Circular.