India’s financial services industry has welcomed a framework in the Gift City special economic zone allowing capital relief on credit-insured factoring exposures, but benefits are set to be muted for the country’s domestic banks.
The International Financial Services Centres Authority (IFSCA), which regulates businesses in Gift City, published a circular last week permitting eligible finance companies and finance units to benefit from lower capital requirements when factoring exposures are protected by eligible credit insurance, guarantees and other recognised forms of credit risk mitigation.
It has also formally recognised the two-factor model used internationally by networks such as Factors Chain International, under which the import factor assumes the buyer credit risk.
The announcement is a milestone for an industry that has spent years lobbying Indian regulators to recognise trade credit insurance as an eligible credit risk mitigant for capital purposes, bringing Gift City closer to frameworks already in place in Europe and Singapore.
“The introduction of capital relief for credit-insured factoring exposures is a vital reform and aligns Gift City more closely with international norms,” said Ravi Valecha, chief executive of India Factoring and Finance Solutions.
“Until now, many banks and financial institutions in India had been hesitant to fully embrace factoring, largely because the crucial provision of capital relief – so common internationally – was missing domestically,” he said.
However, the new framework does not extend to much of India’s mainstream banking sector, which is regulated by the Reserve Bank of India (RBI).
The RBI does not currently recognise trade credit insurance as a credit risk mitigant and only gives capital relief where cover comes from India’s export credit agency, ECGC – the change banks and insurers have been lobbying for, as GTR reported last year.
Instead, the circular is limited to finance companies and finance units regulated under the IFSCA’s Finance Company Regulations 2021, the vehicles through which factoring, forfaiting and similar activities are conducted in Gift City.
Global banks are also “well positioned to make full use of the capital relief, as long as they are booking business through their Gift City units and remain aligned with their parent jurisdictions’ requirements”, Valecha said.
“On the other hand, local Indian banks that fall under the direct supervision of the RBI must continue to adhere to its regulations. As a result, these banks are not able to take full advantage of the capital relief offered by the new circular at this time.”
Who will benefit?
With this change, the IFSCA has “opened up a substantial opportunity”, particularly for independent financial companies – which are typically set up as independent subsidiaries and are governed solely by IFSCA regulations – and international banks’ branches operating within its zone, Valecha pointed out.
A spokesperson for Singapore-headquartered trade finance platform 360tf, which offers factoring through Gift City, also said the reforms would “create a strong case for new cross-border receivables finance businesses to be established within the IFSC ecosystem”.
360tf added that the framework could particularly improve access to financing for SMEs by enabling financiers to convert receivables into liquidity while managing credit risk more efficiently.
“From a market perspective, this circular is more likely to accelerate the growth of specialised factoring and receivables finance businesses in Gift City than drive an immediate relocation of existing bank portfolios.
“Over time, we could see banks exploring dedicated IFSC finance vehicles for cross-border factoring, but the immediate impact is expected to be strongest among specialist factors, trade finance companies and new entrants seeking to build scalable receivables finance platforms,” the 360tf spokesperson said.
One executive at a global trade credit insurer cautioned that activity could remain constrained until specialist trade credit insurers establish a presence in Gift City.
Nevertheless, the latest reforms represent the first time an Indian regulator has formally recognised a broader range of credit protection mechanisms for factoring capital relief, potentially making Gift City a more attractive location for booking cross-border receivables finance, industry figures argued.
“I believe this is a very positive step forward for the Indian factoring market […] that should meaningfully accelerate the growth of factoring, especially for international, cross-border transactions,” India Factoring’s Valecha said.
