Our best bet on supply chain finance the receivable finance model (Factoring) has been riddled with challenges in India. Blame it on not one but many factors. One, for example, is appalling NPAs which has pushed the financial systems into a horrendous loop of elaborate verifications and demanding documentation. Verification and Documentation being directly proportional to each other, fuels this loop. More verification requires more documentation and this, in turn, demands more verifications. This vicious cycle makes transacting a deal into a cumbersome ordeal where both the financer and the customer is tested to the breaking point. Thus instead of making the system candour, which is supposed to give simple and unsecured funding to the needy small and medium scale units, it takes away the simplicity and ease of operation.
The process needs to ascertain that the underlying trade has happened. There is no double finance from the banking system. The acceptance of the buyer is genuine. The buyer has accepted the assignment of the receivable and the payment will be sent to the financer by the buyer on the due date.
The process today starts with a ledger audit and verifications on the buyer and supplier. It goes on to verify the transaction documents. Phone calls to buyer material receiving and payables departments, vetting of transport documents, reference checks to bankers, and multiple observations and clarifications to be rectified by the seller. On the top of its very high cost of finance. This whole process of onboarding and transaction is very time-consuming, which brings in resistance from all the parties buyers, sellers and existing working capital bankers to provide the required references and documents such as NOC from banks, accepted notice of assignment from buyer and answer to the various verification calls. Genuine customers will find it hard to tolerate all this and stick to this process. They soon will junk this for normal working capital from banks.
What even make things worse is the fact that NBFC population is very high and effectively regulating this entire market is a challenge.
TReDS is a RBI regulated trading platform for buying and selling receivables on a bidding model. RBI under the Payment and Settlement System (PSS) Act 2007 has issued TReDS license to only three companies in India till now, one of which is Mynd Solutions.
This is an open architecture system which is transparent to all the stakeholders and end to end automated and digital.
After providing KYC and respective documentation The MSME sellers, their buyers and interested Financiers can get registered on the platform. Once registered, the sellers or Buyers can upload the invoices/ BOEs (Bills of Exchange) onto the platform. The complete process is digitalized and uses minimum human intervention. These Invoices/BOEs is made visible to the buyers who can ascend their acceptance for payment on the due date.
Once the invoices/ BOEs are accepted, they are bundled into factoring units ( based on the same due dates) by the system. The factoring units are visible to the financiers along with other stakeholders. Now the financiers can bid for the units. The bids are accepted at the end of the bidding window or at the acceptance of the bid by the seller at any point during the bidding window.
Once the bid is accepted the onward settlement happens by payment from the financier to the supplier. On the due date, the settlement is completed by debiting the Buyer’s account with his bank and crediting the respective financier.
This addresses all the concerns of a current factoring/receivable finance ecosystem. Being an open architecture for onboarding of the buyer and seller on a transparent platform, all stakeholders can transparently see the bill details the validated acceptance the bill value due date etc. Also, the financier can safely assume the repayment of the bill discounted will directly come to him from the buyer in full without any dilution. This enhances the process of getting the receivables for MSME and lowers down the time spent in verification processes and ledger audits.
About the author:
Jacob has served two decades in the banking and finance industry. Currently, he is the COO of M1 Xchange, TReDS Business of Mynd Solutions. He has worked extensively in the supply chain finance space with industry pioneers like Citigroup, HSBC, and ICICI Bank Ltd. Today as a part of his COO role, he is involved in creating a sustainable growth oriented organization.