TReDS – Know Everything about Trade Receivable Discounting System

Shailza Sharma

28 Jan, 2021

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.

Introduction

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 16^th 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.

What Is TRedS?

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.

Definition

“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 financing purpose.’’

Who can be the Participants to TReDS?

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.

What is the working mechanism of TReDS?

What is the salient feature of TReDS?

What are the TReDS Existing Platforms?

The transaction processed under Trade Receivable Discounting System is without the recourse to MSME’s, which means that MSME vendor^[1] 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.

Hon’ble 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.

What is the working flow of TReDS?

• The process starts at the time when corporate and other buyers, including Government, PSU send their purchase order to the MSME seller.
• After receiving the order, the seller delivers the goods with invoice or bill of exchange, depends upon the trade practice between both sellers and buyers.
• Now, the seller will create a standard nomenclature,  generally used in the TReDS for an invoice or a bill on a system called factoring unit. Now, the buyer will also log on to his account in TReDS and change the status of as received in the factoring unit.
• Factoring units will be now verified by the corporate buyers and TReDS will provide them filtering platform. These factoring units can be either invoice or bill or can be two separate modules for transactions. It’s important to mention the details of buyers and sellers, the issue date, the due date, and other details related to transactions in the factoring units.
•  With the integral feature of having the form of bank and account details of buyer’s, TReDS shall inform the buyer’s bank about the creation of such featuring unit.
• These factoring units will be once available on the TReDS platform can be accessed by the registered financers. Now Financer will quote their bids against the factoring units.
• Bids once accepted by the MSME seller, financer cannot revise the bid. Hereafter, the factoring unit will now be flagged to Financed and funds will be credited to the seller’s account by the financer on T+2 settlement basis.
• After that, the debt will be assigned to the financer by the MSME seller, and on the due date, the corporate buyer is entitled to pay it. On the nonpayment, the corporate buyer can be penalized under the provision of the Act.  Remaining factoring units will be paid by the corporate buyer outside the TReDS platform.

What are the benefits of TReDS?

Benefits to the buyer-

•  With the registration on TReDS, the buyer can efficiently manage its cash flow.
•  It ensures efficient payment cycles without any delay.
•  It involves less paperwork and costs.
• More Transparency.

Benefits to the seller-

• TReDS provides the best discount rate due to the participation of Multiple Financiers in the auction.
•  There is Efficient capital deployment
• The seller can get a receipt of funds on a reasonable time.
• It involves less paperwork and costs.
• TReDS is more helpful in Business growth due to improved liquidity.

Benefits to the Financer

•  Financer can have access to a wider market.
•  TReDS assures qualified instruments.
• It reduces the operational cost.

Conclusion

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.