Read the given below two statements and mark the correct answer.

Assertion (A):  Factoring is a financial service under which the ‘factor’ renders various services of Discounting of bills with or without recourse and collection of the client’s debts.
Reason (R) : Under recourse factoring, the client is protected against the risk of bad debts.

Assertion (A) is true but Reason (R) is False

The correct answer is option 3- Assertion (A) is true but Reason (R) is False.

Assertion (A):  Factoring is a financial service under which the ‘factor’ renders various services of Discounting of bills with or without recourse and collection of the client’s debts. THIS IS TRUE.
Reason (R) : Under recourse factoring, the client is protected against the risk of bad debts. THIS IS FALSE. Client is not protected against the risk of bad debts under the recourse factoring.

Factoring is a financial service under which the ‘factor’ renders various services which includes:

(a) Discounting of bills (with or without recourse) and collection of the client’s debts. Under this, the receivables on account of sale of goods or services are sold to the factor at a certain discount. The factor becomes responsible for all credit control and debt collection from the buyer and provides protection against any bad debt losses to the firm. There are two methods of factoring — recourse and non-recourse. Under recourse factoring, the client is not protected against the risk of bad debts. On the other hand, the factor assumes the entire credit risk under non-recourse factoring i.e., full amount of invoice is paid to the client in the event of the debt becoming bad.

(b) Providing information about credit worthiness of prospective client’s etc., Factors hold large amounts of information about the trading histories of the firms. This can be valuable to those who are using factoring services and can thereby avoid doing business with customers having poor payment record. Factors may also offer relevant consultancy services in the areas of finance, marketing, etc. The factor charges fees for the services rendered. Factoring appeared on the Indian financial scene only in the early nineties as a result of RBI initiatives. The organisations that provides such services include SBI Factors and Commercial Services Ltd., Canbank Factors Ltd., Foremost Factors Ltd., State Bank of India, Canara Bank, Punjab National Bank, Allahabad Bank. In addition, many non-banking finance companies and other agencies provide factoring service.