Background

Micro, Small and Medium Enterprises (MSMEs) represent a significant part of the Indian economy and are one of the strongest drivers of economic development, innovation and employment.

Despite this sector’s vast potential, certain challenges are hampering its rapid growth. One of the challenges faced by MSMEs is the delayed payment from corporate buyers leading to a shortage of working capital for their regular business operations.

To address the financing related issues faced by MSMEs in India, RBI in 2014 introduced the concept of TReDS, a mechanism of trade receivables financing for MSMEs on a secure digital platform.

TReDS Technology-driven alternative funding platform for MSMEs

Three platforms were granted licenses by RBI to operate on the TReDS mechanism in 2017, including Mynd Solutions’ M1Xchange, Invoice mart (a joint venture between mjunction services and Axis Bank), and RXIL (a joint venture between NSE and SIDBI).

What is TReDS?

Trade Receivable Discounting System (TReDS) is an electronic platform for facilitating the financing / discounting of trade receivables of MSMEs through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).

The TReDS will provide the platform to bring different participants together for facilitating uploading, accepting, discounting, trading and settlement of the invoices/bills of MSMEs.

Participants

The eligible entities who can participate in the TReDS platform are MSME Seller, Buyer (Corporates, Government Departments, PSUs and any other entity) and Financier (Banks, NBFC – Factors and other financial institutions permitted by RBI).

Salient Features of TReDS

  • Unified Platform for Sellers, Buyers and Financiers
  • Easy Access to Fund
  • Eliminates Paper
  • Transact Online
  • Competitive Discount Rates
  • Seamless Data Flow
  • Standardized Practices

How does TReDS work?

Generally, the following steps are followed while financing/discounting through TReDS:

  • Uploading of invoices/bills and creation of factoring units on TReDS platform by the MSME sellers (in case of factoring) or the buyer (in case of reverse factoring). A Factoring Unit (FU) contains the necessary details of the invoice in digital format.
  • Acceptance of the FU by the counterparty – buyer or the seller, as the case may be
  • Bidding by financiers against the FU
  • Selection of best bid by the seller or the buyer, as the case may be
  • Payment by the financier (of the selected bid) to the MSME seller at the agreed rate of financing / discounting.
  • Payment by the buyer to the financier on the due date

Benefits of TReDS

For the Seller:

Quicker Payments -MSME sellers receive funds against approved invoices within 48 hours

Multiple Financiers – MSMEs are not restricted to a single bank. Have the option to choose the lowest bids among the multiple financiers.

Without Recourse Borrowing – No obligation on the seller to repay the financier in case the buyer defaults in repayment.

Lower Cost of Funds -Transparent bidding process to discover the most suitable price. The seller can access financing at competitive terms as it is based on the credit rating of the buyer.

Off-Balance-Sheet Finance– Offers a collateral-free bill discounting service that doesn’t impact the balance sheet of the business as it involves the sale of receivables.

Collateral- Free Working Capital – Seller can gain access to working capital using unpaid invoices through bill discounting

Business Growth – Business growth and expansion with timely access to money

For the Buyer:

Efficient Cash-Flow Management – By registering on TReDS, the buyer can properly track its cash flow.

Compliant with MSMED Act,2006 – Buyer can better manage their Working capital cycle and make timely payments to MSME in compliance with MSMED Act,2006.

Saving on Finance Costs by extending credit period.

More Transparency – Lower administrative cost.

Saving on Procurement Costs – Buyer can negotiate better terms with MSME Vendors.

For the Financer:

Cost Reduction – It reduces the operational cost

Automated Transparent Platform – The Financer may have access to a broader market. TReDS ensures instrument qualification.

Challenges in the adoption of TReDS

  • The Ministry of Micro, Small and Medium Enterprises vide its Notification dated 02.11.2018 has mandated all companies with a turnover of more than Rs. 500 crore and all Central Public Sector Enterprises, to get themselves onboarded on the TReDS platform. Despite the mandate of the Government that all CPSEs sign up on the TReDS Platforms to improve the cash flows of MSMEs, many have yet to comply with the mandate. Only 177 of the 255 CPSEs had registered on the TReDS platform to date.
  • Big corporate houses are not comfortable with uploading invoices on online platforms. Being a transparent system, these corporates are not appreciating the fact that they are required to ensure the settlement of the MSME invoices within the prescribed period of 45 days from the date of acceptance of goods or services rendered by the MSME. This is especially true in the case of PSUs, which have a track record for payment delays. Between the three platforms, volumes generated by PSUs is not more than about 7-8%.
  • As per the Report on Impact of COVID-19 Pandemic on MSME Sector and Mitigation Strategy Adopted to Counter It, it was observed that MSMEs do not publish their invoices on the TReDS platform despite having the registration due to unsaid pressure from corporate (buyers). Further, it was seen that corporate (buyers) do not approve the published invoices of MSMEs on the TReDS platform, which defies the sole purpose of the platform, as Banks cannot fund such invoices.

To increase its adoption, there is a need to spread awareness around the value proposition of the TReDS platforms amongst MSMEs and Corporates

Conclusion

Over the last 3 years, TReDS has emerged as a next-generation ecosystem for MSME enterprises to finance their receivables at competitive rates and thereby overcoming the challenge of delayed payments. TReDS has tremendous potential to solve the MSME woes relating to working capital management.

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Qualification: CA in Practice
Company: KESHRI & ASSOCIATES
Location: KOLKATA, West Bengal, India
Member Since: 26 Sep 2021 | Total Posts: 2
My 10 years of rich and diversified work experience includes Business Advisory and Financial Consulting services to clients across a wide range of industries , Statutory Audits, Internal Audits and Concurrent Audits of both Public and Private Sector Enterprises including Banks. Mentor for MSMEs & View Full Profile

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