TReDS- An Introduction
Trade Receivables Discounting System or TReDS is a RBI initiative to help the MSMEs in getting competitive finance so that their working capital requirements are met on time which is vital for their growth.
The participants involved in TReDS are MSME suppliers, large corporate buyers and financiers (Banks or NBFC Factors).
Financiers are one of key participants on TReDS, who bid on Factoring Units (which have Invoices or “Bill of Exchange” as underlying instruments) that have been uploaded by the supplier and approved by the buyer. The financiers bid on the ‘factoring units’ basis the credit comfort on Large Corporates whom MSME vendors have supplied goods. This gives MSME suppliers a choice to select the most favourable bid & receive funds faster.
TReDS- Beneficial Ecosystem for Financier
In today regime, most of the banks are looking for digitised solutions hence attraction for Fintech segment has increased a lot in Banking Industry as well like other industries. Many banks have introduced digital bank accounts and has added huge customer base in a very cost efficient manner which shows the success & power of digital solutions. Many banks are partnering with many Fintech companies to enhance their offerings to customers. M1xchange is appreciated and utilised by the financiers as it provides access to large corporate & MSME customer base in cost efficient manner.
The linkage of all stakeholders vide the digital platform benefit the entire Supply chain ecosystem and in specific to needs of financiers.
M1xchange being RBI regulated TReDS platform provides opportunity to the financiers to get quality assets in the MSME space across a wide geography in minimal time, cost and effort. M1 automates the entire financing process, thereby, bringing down the turnaround time and enhancing customer experience.
The key benefits to the financiers are as follows:
Fulfil PSL (Priority Sector Lending) targets more efficiently
With the TReDS kind of institutional mechanism, Financial Institutions have the opportunity to build a quality PSL asset portfolio in MSME space.
Reduced Operational Cost and Reduced Risk
M1 is a centralised system that facilitates Buyer, Supplier & Financier to come on same platform with one agreement binding all stakeholders. The approval of invoice by Buyer enhances transparency of transaction and their commitment. The ease of use is very high for the financiers as trail of the transaction is online and involvement of manual labour is limited to approving the transaction on the exchange. The connect with the customer is online and time for the transaction on the digital platform is reduced to minutes in a day. This being cost effective also provide financiers access to a MSME client base without any additional cost and infrastructure for onboarding.
Informed decisions for enhanced profitability
M1 enables financiers to take informed decisions by facilitating effective data collection and analysis related to Buyer & Supplier which makes it possible for financiers to take astute decisions.
TReDS being authorised under Payment and Settlement system ACT, 2007 facilitates settlement of funds per regulated mechanism using NPCI settlement process subject to availability of funds in Financier (in Leg 1 when discounting proceeds are transferred from Financier to Supplier) & Buyer account (in Leg 2 when final settlement happens between Buyer & Financier). As per Settlement process, NACH mandate is taken and registered at the time of on-boarding from Financier & Buyer which is used to pull the funds from bank account of particular participant (i.e. Financier in Leg 1 and Buyer in Leg 2) and transferred the same into the bank of corresponding party. Exchange sends advance alerts/reminders to Buyer in order to ensure that they are aware of approaching settlement date & amount and make the necessary fund arrangement accordingly.
Further, exchange provides the facility to request for extension from the financier on platform (which can be accepted by Financier at its sole discretion). This provides flexibility in the scenarios when there are contingent liquidity issues at Buyer end on any particular day when payment is falling due.
Above mechanism reduces the operational risk of settlement and makes the process more controlled, reliable and robust for Financiers
Legal Framework-An important aspect for Financier
Banks & NBFC Factor companies have been doing lot of documentation to factor the transactions to manage legal recourse in case of any default. Hence, it is very imperative that Legal Framework being used by TReDS is strong enough to enable financier to take legal enforcement in case of any default while keeping the same easy & simple for other participants.
M1xchange offers very sound legal framework to ensure that Financier are fully comfortable on this aspect. The key highlights of M1 system in this regard are as below:
- All the participants including the financiers, buyers & sellers sign the ‘Master Agreement’ with M1xchange, which narrates the rights & responsibilities of participants towards M1xchange & other participants. This is a legal document and provides basic sanctity to the transaction on platform.
- M1xchange has introduced the concept of “Digital Signing” of documents at every step so that non-repudiation by the participants for transactions undertaken is ensured. Thus all actions of Buyer & Seller on exchange (towards acceptance & approvals) are approved by participants using digital signature and these are saved as transcripts on system. All the documents digitally signed on the platform have the legal validity & enforcement as per Information Technology Act, 2000.
- M1xchange facilitates Supplier to digitally sign the “Deed of Assignment” on M1xchange which transfers the title of receivable in the favour of Financier for every transaction where bid has been won by Financier. M1xchange sends the “Notice of Assignment” to Buyer per authorisation from Supplier/Financier. These steps meets the requirement of Factoring Act, 2011 and give better legal entitlement to Financier towards the receivable financed by them.
M1 Support and Security
M1xchange has been developed to suit the requirements of participants while keeping the transactions safe, secured and confidential. It has been designed with the principle of Security First. Effective security measures are taken at infrastructure and application level to ensure that the customer and transaction data is not compromised. Further, the servers are not accessible to any user other than the authorised server administrators, the access by whom happens through multifactor authentication and all access is logged and audited.
Platform has been audited by independent CISA auditor for the required standards of safety.
Apart from IT security, M1xchange enables many checks and controls at process level to ensure transactions are monitored regularly. KYC of participants, Defaulter lists checks, BDD & STR controls, Random audits are some of the controls put in place by M1xchange which has enforced more trust in financiers joining the exchange.
Future Roadmap for TReDS
Though it is a new concept in India, however, the way it is being accepted by all the participants shows the promising future for this landmark mechanism introduced by RBI in India.
It is viewed as long term digital movement in the banking space which will facilitate the faster, cost effective & competitive finance to MSME while for Financiers this will be a key contributor for scaling up their business without investing much by using the power of Fintech phenomenon. Buyers get a secured mechanism to help their vendor ecosystems which bring better services & commercial terms from vendors. This win-win proposition for all participants is a humble attempt by M1xchange to service the need of Supply chain financing.