TReDS – A Game changer for MSMEs

Micro, Small Medium Enterprises (MSMEs) majorly contribute to the Indian economy. As per the press release of the Ministry of MSMEs on 22^nd July 2014, MSMEs including the service sector has a share of 37.54% in the year 2012-13 and its share in India’s total export in the year 2014-15 is 42.58%.
(Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=107201)

Despite being the major contributor, MSMEs face the challenge of financing their receivables. To enhance the growth of the Indian economy and to make enough liquidity available to MSMEs, RBI under the payment and settlement Act, 2007 facilitated the financing of trade receivables into liquid funds in a short time through an automated portal called TReDS.

The TReDS or Trade Receivables e-discounting System enables receivables factoring and reverse factoring to ease higher transaction volumes and better pricing. In short, all MSMEs can discount their invoices via TReDS.

The Process of Treds

The parties involved in this platform are MSME sellers, corporate buyers, and two or more financiers. All the participants are provided with the system to upload, accept, discount, trade, and settle the invoices on a digital platform. The parties and the TReDS are bound by a one-time agreement which is called the master agreement. In the process of getting on board with TReDS, the sellers’ and the buyers’ KYC documentation are required. The process is initiated with sellers uploading the invoice on the portal, which is followed by the buyer approving it, by logging into TReDS platform. After the buyer’s approval, the invoice is then converted into a factoring unit and is made available to the financiers for bidding. Competitive prices are offered by the banks. The best price is then chosen by the seller. MSMEs and corporate buyers can view both of their information on this platform and bankers are provided with filtered information to support the discounting of invoices for the respective clients. To ensure the authenticity of the entire process, random audits are done.

Benefits of TReDs to Different Parties

Corporates Buyers

1. Reverse factoring help buyers to enable early payment to their vendors without any borrowing limits on their books.
2. The cost of goods and services for Buyers will get reduced as the automated payment and bidding model involved in this process will decrease the interest cost to a great range.
3. Categorization of transactions on TReDS as Priority sector lending for banks is another reason for the availability of liquidity at an attractive rate of interest.
4. Buyers can seek extended credit of the payables if required.
5. Availability of funds is very high on TReDS due to the participation of multiple banks and NBFC’s, thereby enabling the book-building process for corporates for the best rate of interest.
6. The reconciliation process for payments to vendors and their financing is an end to end automated process.
7. Buyers will be able to build a robust and loyal vendor eco-system with a partnership approach of enabling the credit for its vendors.

MSMEs Suppliers

1. TReDs ensure quick availability of finances to suppliers at favorable rates.
2. The quicker realization of financials to the suppliers, which facilitates enough liquidity flow to suppliers to carry out their everyday processes and business development.
3. TReDS portal supports a hassle-free and paper-less documentation of the payment, hence, it saves time and cost.
4. Substantial savings and adequate cash flow smoothen the relationship of suppliers with their buyers.

Financiers

1. This portal will help banks to increase their customer base to a great extent and improve their goodwill.
2. The turnaround time and cost are reduced largely as the process is entirely automated.
3. This is a facility to make better decision making for banks through key information availability

Technological Support

To carry out this important and connected process between various parties, a much stable technology needs to be used to avoid any constraints. This is why, RBI has formed liaise with Mynd as one of the key service players in the Supply chain market, who can provide effective services as well as security to carry out the processes of this initiative.

Also read these – Working capital financing, SME Finance, Invoice Financing, Accounts Receivable Financing, Supply chain financing, Factoring Services