While the government is prodding the micro, small and medium enterprise (MSME) sector to drive the economy to its next phase of growth and job creation, the entire sector is grappling with challenges of getting their payments on time. Big corporates, which usually source a part of their products from MSMEs, mostly do not pay on time, thereby causing cash availability issues for such small entities. Various regulatory norms as well as legal bindings, too, have failed to make the system efficient.
Hence, the RBI has decided to come out with TReDS (Trade Receivables Discounting System) to take the entire bill discounting process online and ensure an element of fairness. ET finds out how TReDS is designed, and whether it can change MSME financing in India.
1.What is TReDS?
It is an institutional mechanism for facilitating the financing of trade receivable of MSMEs from corporate entities and other buyers. This scheme is expected to discount both invoices as well as bill of exchanges. This can be created either by the corporate or the MSME and other buyers which can include even the government and other PSUs. The financer is the bank, or the NBFC, which is participating in the TReDs platform and which accepts the factoring unit for financing.
2.Why do we need TReDs?
The need for a digital platform for financing of trade receivable was felt in the context of unlocking the power of the MSME sector. The sector has been historically plagued by delayed payments from corporate entities and very high dependence on corporate buyers. After various committees looked into the issue, it was recommended to have a digital institutional infrastructure for creating liquidity for trade derivables in the system.
3.How will the process work?
The process flow includes creation and uploading of bills and invoices on an online platform by the MSME sellers and it needs to be accepted by the buyer within a specified date. After this, discounting on the bills will be done by the financiers, resulting in payments being made to the MSME by the bank on behalf of the corporate. The final settlement will need to be done by the corporate to the bank. Hence, the bank actually takes a credit risk on the corporate entity. All funding done by lende.
4.Who are the players on the TReDS platform?
As of now, the Reserve Bank of India has licensed three entities to participate on the TReDS platform: 1. NSE Strategic Investment Corporation (NSICL) and Small Industries Development Bank of India (SIDBI) 2. Axis BankBSE 0.23 % 3. Mynd Solutions which runs M1Exchange. These licensed entities are expected to develop the platform and allow the MSMEs, corporate buyers and banks or NBFCs, to come together to facilitate the process.