Factoring and FIRP(Foreign Inward Remittance Payment Scheme)
Factoring has been a common practice in the U.K. and U.S.A. Oflate, in India a factoring market has been developed. "Factoring" is a continuing arrangement between a finance institution(factors) and a business concern(the client) selling goods and services to trade customers(the customers) whereby the factors purchases the client's book depts(accounts) receivable either with or without recourse to the client and in relation therto controls the credit extended to the customers and administers the sales ledger.
Elements in factoring services:
1. Providing of post sale finance to the supliers.
2. Collection of receivables and sales ledger maintenance.
3. Protection against bad debts.
4. Consultancy services.
Limitations of factoring:
1. Factoring is simple in its mechanism. But it is a high risk venture. Particularly the client may be dishonest. Dishonesty may be in the form of fictitious invoicing, pre invoicing or duplicate invoicing.
2. Small clienets (with turn over say Rs. 10 lakhs) may not find factoring services useful. The cost of such services may be disproportionate for them.
3. Companies with limited number of debtors may not find factoring services useful.
4. Evaluation of factoring proposal is more complicated.
Foreign Inward Remittance Payment Scheme (FIRPS)
FIRPS is an instrument which facilitates remittance of money from foreign countries. It relates to foreign inward remittance. NRIs or foreign nationals can remit money in foreign currency to any persons in India. For this an order is issued by the bank abroad to its correspondent bank in India. The order specifies a sum to pay to the person named in the document. Such document is encashable only at the correspondent bank in India.
Under this scheme, the correspondent bank converts the ordered sum into Indian currency at the prevailing rate of exchange.
It is the another another document in favour of the beneficiary.
In practise, the FIRP document is a negotiableinstrument. So it can be encashable at any branch which is the member of the Foreign Exchange Dealers Association of India.
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