PSD Circular No. 01: Guidelines for Local Factoring/Receivable Financing through Digital Platform - Pilot Phase

Managing Director/Chief Executive Officer, All Scheduled Banks and all Financial Institutions operating in Bangladesh.

Dear Sir,

Subject: Regarding the observance of Guidelines for Local Factoring/Receivable Financing through Digital Platform in the Micro, Small and Medium Enterprise (MSME) sector.

You are aware that Micro, Small and Medium Enterprises (MSMEs) are an important sector for poverty alleviation, employment generation, and economic growth. Despite various types of loan assistance programs running nationally, realizing the importance of this sector, the process of obtaining financial assistance according to the needs of the concerned entrepreneurs is not easy due to various obstacles. Moreover, even after receiving a loan, the process of immediately receiving funds against the 'Trade Receivables' obtained by manufacturing products and supplying them to buyer institutions is not easy and automated, and due to the non-observance of market-based pricing methods, MSMEs are facing various problems with working capital.

Considering the above problems of institutions in the MSME sector, and realizing the necessity of a Digital Platform for automated financing/supply chain financing against the internal 'Trade Receivables' of these institutions, this department has prepared 'Guidelines for Local Factoring/Receivable Financing: Through Digital Platform - Pilot Phase' for conducting a pilot program in this regard, which banks and financial institutions are advised to follow.

MSMEs will be able to upload trade receivables electronically on this platform, and interested investors, i.e., banks and financial institutions operating in the country, will be able to invest against these 'Trade Receivables'. As a result, MSME institutions will receive funds quickly and easily against their trade receivables, and their business operations will become easier. On the other hand, investors will benefit by receiving the full value of the trade receivable from the buyer institution upon its maturity.

In this context, in accordance with the 'Guidelines for Local Factoring/Receivable Financing: Through Digital Platform - Pilot Phase', ThinkBig Solutions Ltd. has been granted approval {Permission Letter No: PSD(RFFO)/1/2022-188, Date: 18 January, 2022} to operate the Local Factoring/Receivable Financing platform on a pilot basis.

This directive is issued under the powers granted by the 'Bangladesh Payment and Settlement Systems Regulation-2014' issued under Section 7(A)(E) of the Bangladesh Bank Order 1972.

This directive will be effective immediately.

Yours faithfully, (Md. Mezbaul Haque) General Manager Phone: 9530174

Attachment

1. Guidelines for Local Factoring/Receivable Financing: Through Digital Platform - Pilot Phase www.bb.org.bd Payment Systems Department Bangladesh Bank Head Office Dhaka PSD Circular No: 1

4 Magh 1428 Date: ------------------- 18 January 2022

Guidelines for Local Factoring/Receivable Financing: Through Digital Platform - Pilot Phase Payment Systems Department Bangladesh Bank 2022

Introduction

1. Micro, small and medium enterprises (MSMEs) are key drivers of economic growth and poverty alleviation in Bangladesh. Contributing 25 percent to the country's GDP, MSMEs play a crucial role in employment generation and resource utilization. According to the Economic Census, 2013 conducted by World Bank and Enterprise Survey, 2013 conducted by Bangladesh Bureau of Statistics (BBS), some 99 percent of all non-farm enterprises fall into the micro and small enterprises categories providing employment to 20.3 million Bangladeshi workers.
2. However, the exclusion of majority of the MSMEs from the formal lending ecosystems inhibits their growth. A majority of these MSMEs do not have access to sufficient credit and liquidity required for their daily working capital needs. One of the pressing issues has been the reluctance of formal sector to lend to MSMEs due to high perceived risks and higher operational cost since the loan size is very small and requires intensive monitoring and supervision. Also, MSMEs are highly unlikely to comply with the collateral requirements as typically they do not have immovable properties. MSMEs also lack in providing necessary documentation in terms of required legal and formal agreements. On the other hand, terms and conditions for receiving loan by MSMEs from micro finance institutions is not favorable and often the interest rate is too high. Thus, MSMEs mostly depend on informal sources of funds which results in higher borrowing cost. In this way, MSMEs have struggled to raise funds from formal sources resulting in a significant credit gap for the sector.

Scope of Local Factoring/Receivable Financing 3. Local factoring/receivable financing can fill the credit gap for MSMEs in a cost-effective and efficient way. It can provide new option that aims to finance MSMEs by using accepted invoices and receivables as intermittent collaterals. Broadly, receivables financing is a term that describes several different techniques a business can use to raise funds against the amounts owed to it by its customers in outstanding invoices, also known as its trade receivables or accounts receivable. In short, as a process: a) A corporate firm purchases products from MSME; b) MSME receives an accepted invoice (which has a maturity date) from the large firm after delivery of products; c) MSME sells the accepted invoice to a Financier [Bank/NBFI(Non Banking Financial Institution)] at a discount and receives cash immediately; d) Financier receives the total amount from the corporate firm at invoice maturity. 4. Bangladesh Bank (BB) with a view to developing the MSMEs in Bangladesh has taken noteworthy initiatives including improving existing environment in the formal sector through regulatory and policy interventions as well as different refinancing schemes. Following these initiatives, banks and NBFIs have given emphasis on financing to MSMEs. Even after the emphasis given by the formal sector, still there is scope to improve the scenario. Hence, a guideline by BB on local factoring/receivable financing through digital platform can encourage the financial institutions to invest in MSMEs which will open an avenue of short-term financing opportunities for these entrepreneurs. Besides, a technology based platform will improve efficiency, ensure transparency and reduce cost. At the pilot phase, along with other interventions, Bangladesh Bank has decided to allow setting up digital/electronic platform on pilot basis to automate local factoring/receivable financing.

Current Scenario 5. Current scenario consists of some stand-alone systems provided by some of the banks and NBFIs. These platforms are only available to the A/C holders of the specific banks and NBFIs. Besides, these platforms still require manual process to complete the full cycle of factoring.

Expected Solution 6. A technology based online platform may be set up to facilitate trading among MSMEs, corporate and banks/NBFIs. MSMEs, corporate and banks/NBFIs will be the users of the platform and will be able to participate in the trading of various invoices. Invoices will be uploaded and verified for trading between respective parties. Bank/NBFI as a financier will be able to compare invoices and their issuers and endorsers based on information available in the platform.

Eligibility Criteria for the participants to join into the platform during the Pilot Phase 7. MSMEs, Corporate and Banks/NBFIs with the following criteria will be eligible to participate in the platforms: a) MSMEs: Any MSME entity (direct supplier of the participant corporate), holding accepted invoices; b) Corporate: Any corporate incorporated or operating in Bangladesh; c) Banks/NBFIs: Any bank or NBFI licensed by BB. 8. MSME and Corporate with the following criteria will not be eligible to participate in the platforms: a) MSME and corporate having pending bankruptcy litigation against them; b) MSME and corporate who are loan defaulter of any Bank/NBFI as per the law of land; c) Banks/NBFIs will not discount any invoices where any of their director and director's family members (as defined in Bank Company Act' 1991 & Non Banking Financial Institution Act' 1993) have majority shareholdings (as defined in Bank Company Act' 1991 & Non-Banking Financial Institution Act' 1993) or is a director of either the concern corporate or the concern MSME.

Document Requirement, Preservation & Confidentiality 9. Proper KYC (Know Your Customer) document, audited balance sheet, company profile of the participants (MSMEs and corporate firms) will be collected and maintained (if applicable) by the platform operator. Each participant will have a system generated unique identifier. 10. Approved invoices will only be eligible for financing from one single source and hence to be uploaded and traded in a single platform. Once approved invoices are uploaded in a platform, the relevant MSME must ensure that no other financing facility is being opted against the same invoice elsewhere. 11. Platform will have sole custody of the documents (agreement/KYC/invoice) during business operation. 12. All the data in the platform like bidding and transaction data, KYC documents and any other document that is required during the operation have to be preserved for up to 12 (twelve) years. In case of liquidation, cessation of business or end of NOC period without further approval of business continuity of the platform, documents will be handed over to respective participants or to entities as directed by BB.

Other Operating Conditions 13. MSME sellers, corporate buyers and financiers (Banks and NBFIs) will be participants of the platform. A Memorandum of Understanding (MoU) and necessary participating agreements have to be signed between each participant and the platform. The MoU and the participating agreement will sufficiently detail the roles and responsibilities of each party of the platform. 14. Steps or procedures to be followed: a) MSME will submit an accepted invoice in the platform; b) Platform administrator will check the eligibility of the invoice and then upload the same in the platform; c) Notification will be sent to the approving corporate for necessary approval of the submitted invoice; d) Corporate will approve the invoice within a specified time frame and the approved invoice will become available for bidding by the financiers; e) Financiers will bid for available invoices; f) After a successful bid, the particular invoice will be locked and will not be available for further trading; g) The winning bidder will do a verification of loan default for both the issuer and the approver and will initiate payment and settlement process; h) On settlement confirmation, the ownership of the invoice will be transferred to the financier; i) Information about all the discounted invoices will be made public (through website) by the platform; j) At the maturity of the invoice, corporate will settle the fund against the invoice through its nominated bank and inform the platform accordingly. The platform will send prior notice to the corporate about the upcoming maturity of the invoice; k) The platform will record all the information of such settlement and update the status of each outstanding invoice. 15. In case of a failure or default in maturity payment, the platform will provide reminders to the corporate for immediate payment and otherwise, will provide necessary support to the financier to recover the investment. 16. The pilot phase will be for 1 year. Platform owners will be given 4-month period prior to the pilot phase to prepare for the infrastructure and complete all initial agreements with the participants. In case of failure or postponement of the pilot phase, 6-month period will be allowed to settle all the outstanding invoices. No new invoice shall be uploaded or approved in the system during this 6-month period. 17. During the pilot phase, BB will have the right to stop such operation by providing a 7-day notice to the platform provider. The platform provider shall get 120 days more to settle all the existing outstanding dues with all the parties. No new transactions are allowed during this period. 18. The piloting of the proposed system will be conducted with at least Ten (10) banks, Five (5) corporate firms and at least Two (2) MSME suppliers of each corporate. There will be no restrictions on the number of corporate and MSMEs during the pilot phase. 19. Platform should have the capability of interoperable transactions. All such future platforms should be interconnected. 20. Secondary trade of 10% of a financier's portfolio has to be encouraged during the pilot phase. 21. In case of default, the recourse will be on the approving corporate.

Limit of Investment and Transaction 22. Following transaction limit will be followed during the piloting phase:

Serial No.	Type	Limit (In BDT)	Number Word
1	Maximum amount of investment by a single investor/financier to a single corporate buyer at any point of time	5,00,00,000	Five Crore
2	Maximum amount of investment by a single investor/financier at any point of time	20,00,00,000	Twenty Crore
3	Maximum value of a single factoring transaction	25,00,000	Twenty Five Lac
4	Maximum amount of investment a single MSME seller can obtain at any point of time	1,00,00,000	One Crore

Bank Guarantee and Capital Requirement 23. The platform provider needs to provide a bank guarantee of BDT 1,00,00,000 (One Crore) in favor of General Manager, Payment Systems Department, Bangladesh Bank for the whole duration of the piloting phase in order to cover any unforeseen losses that may arise from the operation of the platform to its participants. The format of the bank guarantee has to be approved by BB before issuance of the same. 24. The paid up capital of the platform will be determined by BB at the licensing phase depending on the risk specification of such operation.

Settlement Procedure 25. Platform will have a policy to ensure timely settlement of funds in case of accepted bids and matured invoice. Funds need to be transferred between respective banks (financier bank to MSMEs bank in case of accepted bids and buyer's bank to financier bank in case of invoice maturity) at T+1 basis. To ensure transparency and integrity, financier bank (in case of accepted invoice) and corporate (in case of invoice maturity) will have to confirm about the initiation of agreed amount of payment in the system. The mentioned procedure has to be incorporated in the agreement among platform, financier and corporate buyer. Platform will have to put a separate recourse mechanism in case of settlement failure. 26. Invoices which were not discounted by any financier may be settled by the respective corporate and MSME at the maturity date. This action will be outside the scope of the platform. Platform will remove these invoices from further bidding after maturity date. 27. In case of any transaction related problem, platform should have a dispute resolution process where each participant will be able to raise issues.

Audits, credentials and continuity of the platforms 28. Platform will provide username, password to all the direct participants and also ensure multifactor authentication procedure and maker checker concept at the transaction level. 29. Platform owners will perform regular and random audits regarding the authenticity of the uploaded document (KYC and invoice). 30. Technology infrastructure of the platform should comply with the latest version of "Guideline on ICT Security For Banks and Non-Bank Financial Institutions" by Bangladesh Bank. 31. Platform should have a proper business continuity plan (BCP)/backup IT infrastructure in place.

Evaluation and Monitoring of Pilot Results 32. The performance of the platform will be evaluated and monitored in respect of the following Key Performance Indicators (KPIs) for 12 (Twelve) months of the pilot operation:

Subject	Target
Number of Financier on boarded	10
Number of Corporate on boarded	5
Number of Supplier on boarded	100
Total value of invoices discounted	110 Cr

33. Based on the KPI report and overall assessment of the desired goals, a final report will be prepared for the management of BB with recommendation about the future course of action in this regard. A comprehensive guideline for such operation will be formulated and issued if the management of BB decides to introduce such platform based business modality for MSME financing.

Oversight 34. Regular and ad-hoc onsite and offsite oversight will be performed by Bangladesh Bank on the platform. Based on oversight, upgradation/alteration of the system/business procedure may be suggested during pilot phase.

Exit Policy 35. There should be a proper policy for all participants to exit the platform. In case of completion of provisional period, failure to achieve key performance indicators, cessation of business or any other reason deemed satisfactory to the regulator, there might be an early end of given NOC of pilot. In that case, platform will have to inform the participants at least 2 months ahead. The exit policy for all related parties may be as follows: a) MSMEs: MSMEs can leave the system at any time. As soon as the resignation is accepted, their account in the system will have to be suspended and all of their uploaded invoices which are yet to be financed should be removed from the platform. b) Corporate: Before leaving, a corporate has to inform the platform, MSME and the financier. All the due payments to the financier have to be cleared before the resignation. All the approved invoices of the corporate which are yet to be financed will have to be removed from the platform immediately after the receipt of release request. c) Financiers: A financier can leave at any time. However, if any due payment is there to be received from any corporate after the resignation date, it can settle the matter outside of the platform afterwards. d) Platform Providers: A platform provider may leave at any time giving a notice period of 3 months or the largest maturity date of invoices of that particular moment, whichever is higher. From the notice period, no new invoices shall be uploaded in the system.