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To flatten the cash flow for MSME, Reserve Bank of India decided to set up an operating system known as Trade Receivable Discounting System (TReDS).MSME faces many delays in receiving the payments for the goods and services supplied by them, but the same can resolve by adopting TReDS.
Table of Contents
MSME is an Acronym of Micro, Small and Medium Enterprise. MSME’s are a small-sized business can be defined in terms of their investment. They contribute significantly towards India’s gross industrial output, hence marks their importance in the Indian economy. Not only this, MSME’s is the second-largest employer of India to a large number of skilled and unskilled number of people after agriculture. It also promotes and supports MSMEs through various schemes, subsidies, and even provides many kinds of Incentives through the MSMED Act. In consideration of MSME,s importance, govt. Enabled an Act on 16th June 2006, named as Micro, Small and Medium Enterprise Development Act. It is also one such platform provided by govt. To enhance the MSME sector. Through this blog, we would like you to discuss TReDS, and try to know how it’s helping MSME.
Trade Receivable Discounting System is an electronic platform for facilitating the finance of trade receivables of MSMEs from corporate to other buyers. TReDS is a scheme of govt for discounting invoices as well as the bill of exchanges.
“For the scheme, notwithstanding any
other definition used in any other context, scheme, law or document, the following
definition can be used-
Factoring Unit – A standard nomenclature used in the TReDS for an invoice or bill of system. Factoring units may be created either by the MSME seller or by corporate or any other buyers, including the Government department and PSUs as the case, maybe.
Financier – Refers to banks, NBFC factor, and other financial institutions as permitted
by the RBI participating in the TReDS and anticipating the factoring unit for
The direct participants of Trade Receivable Discounting System include MSME seller, corporate, other buyers, Govt. departments, PSU’s and financers which are banks, NBFC’S and other institutions which are permitted by RBI.
TReDS provide the electronic platforms to all the above-mentioned institutions where together they all can facilitate, upload, accept, discount, trade and settle their invoice or bill of exchanges of MSME. All the participants will get linked to the common platform. After getting the approval from both buyer and seller, the financer (Banks, NBFC) would bid on invoices and then can make payment to the seller.
The transaction processed under Trade Receivable Discounting System is without the recourse to MSME’s, which means that MSME vendor will not be responsible for any nonpayment of the trade receivable amount from buyers. In this context, RBI issued a license to three TReDS platform M1xchange, RXIL, and A.TReDS.
Prime Minister Sh. Narender Modi on November 2018 announced that companies whose
turnover is more than 500 Crore have to registered themselves on TReDS so that
the cash flow can be smoothened in MSME’s.
Benefits to the buyer-
Benefits to the seller-
Benefits to the Financer
If we talk about today, only a few banks and NBFC’s are allowed to be the financer. Whereas to improve the market, and Indian economy, more and more participation from Individuals with high net worth is required. However, with the govt. Efforts in promoting the MSME sectors and its emphasis on the registration of Trade Receivable Discounting System growth in the MSME sector can achieve. With TReDS, MSMEs can ensure more effective capital management.
Also, Read: Digital Trade Finance Platform Launched by MODIFI.
Miss Shailza Sharma, BA.LLB graduate from Himachal Pradesh University. She holds an experience of 2.5 years in various Legal companies and organizations.
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