Trade Finance
An exporter sells its accounts receivable to a third party (factor) at a discount for immediate cash.
The Master Direction permits AD banks “to factor the export receivables on a non-recourse basis, so as to enable the exporters to improve their cash flow and meet their working capital requirements”, and then sets the conditions that make the arrangement recognisable. The Export Factor must have “an arrangement with the Import Factor for credit evaluation & collection of payment”; a “notation should be made on the invoice that importer has to make payment to the Import Factor”; the invoices purchased “should represent genuine trade invoices”; the bank must ensure “that their client is not over financed”; and after factoring the Export Factor closes the export bills and reports them in EDPMS. Where there is no overseas Import Factor, the Export Factor takes credit evaluation details from a correspondent bank abroad. The two-factor structure, in other words, is not merely conventional in India — it is the assumed form, with the single-factor case treated as the exception.
What this source settles. The Reserve Bank of India’s Master Direction is a direction to Authorised Dealer banks under sections 10(4) and 11(1) of FEMA 1999. It settles what an AD bank in India may do and what an Indian exporter must do — not what the instrument means in general commercial use elsewhere. Where the entry above states a rule, it is India’s rule for an Indian transaction; the market practice behind the term is wider than the Direction and is not defined by it.
Export factoring allows Indian exporters to sell their export invoices (accounts receivable) to a factor at a discount, receiving immediate cash instead of waiting for the EU buyer to pay. Two-factor system: Indian export factor purchases the invoice and bears the buyer credit risk; EU import factor collects payment from the EU buyer. Available via FCI (Factors Chain International) member institutions in India and EU.
From the AJG lexicon archive (July 2026).
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