The Insurance Regulatory and Development Authority of India (IRDAI) on October 09, 2023, issued a modification to Guideline 5.3A – allowing “reverse factoring” on TReDS platforms.
The IRDAI examined the feasibility of Trade Credit Insurance cover against “reverse factoring” transactions on TReDS platforms. Trade Credit Insurance cover is provided to the financiers to cover the default of the buyer against the invoices financed on the TReDS platform. IRDAI (Trade Credit Insurance) Guidelines, 2021 allows single Invoice covers through bill discounting/factoring on Invoice discounting e-platforms such as TReDS. However, it restricts cover against reverse factoring transactions to participate as a “Fourth Participant" in TReDS.
In view of the fact that through “reverse factoring”, the financiers can take exposure on low-rated or unrated buyers provided the default risk is hedged with insurers by taking Trade Credit Insurance cover, therefore, in order to facilitate “reverse factoring” transactions on TReDS platform, para 5.3A of the guidelines will be now read as “(a) Reverse Factoring (except on TReDS platforms)”.
This circular shall come into force with immediate effect.
[Circular No. IRDAI/ NL/CIR/GDL/176/10/ 2023]
