MSME

TReDS New Proposals by RBI to Incentivise MSMEs

The Micro, Small, and Medium Enterprises(MSME) sector drives the Indian economy’s expansion, contributing 30% of the country’s GDP, 48% of all exports, and 40% of all employment in the country. Even with the crucial role that MSMEs play in the nation’s socioeconomic growth, the sector is restricted by limited access to financing and the need for operating capital. Poor and delayed access to capital causes cash flow problems, interrupting everyday operations and impeding cross-border expansion aspirations.

It was essential to provide prompt financing to MSMEs, regardless of the loan ticket size, while also taking into account their capacity to provide collateral and their credit score. The Reserve Bank of India (RBI) introduced the Trade Receivables Discounting Scheme to address this prevalent problem (TReDS). The TReDS platform enables registered MSMEs to obtain recourse-free financing within 24 hours against invoices sent to registered purchasers.

The need for new proposals

TReDS is an electronic bill discounting platform governed by the RBI framework and a joint venture between SIDBI and NSE that offers MSMEs fast payments for unpaid trade receivables. The RBI has previously implemented several policies and procedures that were intended to give a wider variety of MSMEs easy access to capital.

The growth in invoice discounting on the TReDS bill discounting platform was impressive. Since the TReDS ecosystem has grown stronger over time, RBI has pushed all partners to help small businesses meet their working capital needs by utilising the digital ecosystem.

To support the receivables market for MSMEs, the TReDS platform’s scope needed to be expanded. It was necessary to include NBFCs and insurance companies under the umbrella to increase the platform’s reach and influence as well as its liquidity.

What are TReDS and its work?

TReDS is an electronic platform that makes it easier for different lenders to finance and discount trade receivables of MSMEs (Micro, Small and Medium-Sized Businesses) through various financiers. These receivables may be owed by businesses and other purchasers, such as government agencies and Public Sector Undertakings (PSUs)^[1].

Vendor unpaid invoices still need to be solved for MSMEs, and COVID has only made matters worse. A platform online called TReDS, or the Trade Receivables Discounting System enables MSME suppliers to discount their bills and invoices. The Trade Receivables Discounting Mechanism was introduced by the RBI in 2018.

The platform makes it possible for MSMEs to get paid more quickly. The platform for SMEs also offers a lower yearly interest pay-out. The basic objective of the TReDS is to enable MSME sellers to negotiate discounts on invoices submitted to big businesses, assisting them in controlling their working capital requirements.

What is the primary goal of TReDS?

The main goal of the TReDS is to make it easier for large organisations, other corporations, public sector undertakings (PSUs), and government departments to finance the invoices of MSME suppliers by discounting them. The system’s participants cooperate to facilitate, accept, discount, and settle the invoices. The main goal of TReDS is to assist MSMEs in managing their working capital needs.

Who can be a TReDS participant? 

The main players in the TReDS platform are sellers from MSMEs exclusively, buyers from any entity, and financiers from NBFCs, factors, and other financial institutions as approved by RBI. This new proposal adds insurance companies as the fourth player on the TReDS platform.

Capital Requirements

• The TReDS shall have a minimum paid-up equity capital of Rs. 25 crores and shall not be permitted to assume any credit risk.
• The present foreign investment policy will apply to any foreign ownership of TReDS.
• The ownership of more than 10% of the equity capital of the TReDS by entities other than the promoters shall be forbidden.

Invoice Discounting 

Companies can utilise invoice discounting to unlock the value of their sales ledger and gain rapid access to money trapped in unpaid invoices. It is simple, when you send an invoice to a customer or client, the lender provides you with a portion of the payment, increasing your cash flow.

Another way to think of invoice discounting is as a succession of short-term business loans supported by invoices. In other words, the lender is ready to give you the majority of the money you owe them before your consumer pays you.

The cash flow of small-to-medium-sized enterprises may be stressed while they wait for customers to pay invoices. Using invoice discounting will help you overcome this challenge.

How does TReDS work?

Generally, the following processes happen when financing or discounting through TReDS:

• The creation of a Factoring Unit (FU) by the MSME seller (in the case of factoring) or the buyer (in the case of reverse factoring), which contains information on the invoices or bills of exchange (evidence of sales of products or services by the MSME sellers to the buyers) on the TReDS platform.
• Acceptance of the FU by the counterparty, which may be the buyer or seller, depending on the situation.
• Financiers bidding.
• Choosing the best bid, as appropriate, by the vendor or the buyer.
• The payment is provided to the MSME seller by the financier (of the chosen bid) at the pre-agreed rate of financing or discounting.
• On the due date, the buyer pays the financier.

Any buyer, seller, or financier is not required to take part in TReDS by the RBI. The reaction from the buyers has been muted. They may be reluctant for a variety of reasons, such as internal procedures, an apathetic attitude regarding payments to be paid to MSMEs, or obligations relating to the balance sheet, among others. Because of this, the government has mandated that certain types of businesses sign up as buyers on the TReDS platforms. However, these entities are not required by government regulation to conduct transactions in TReDS.

Benefits from TReDS

For buyer

• By signing up for TReDS, the buyer can accurately track its cash flow.
• It guarantees smooth and error-free payment cycles.
• It merely requires a minimal sum of money and papers. Being transparent is crucial.

For Vendors

• The Vendor will be able to obtain a receipt of funds in a timely manner.
• It merely requires a minimal sum of money and papers.

For financier

• The financier might be able to access a larger market.
• TReDS makes sure that instruments are qualified.
• It lowers operational costs.

New proposals and policies from Governor’s Monetary Policy Committee Speech

On February 8, 2023, RBI broadened the scope of TReDS in the Governor’s Monetary Policy Committee (MPC) speech, which was the most recent move in this regard.

The key highlights of the new proposal are listed below:

• Insurance companies will be able to participate as “fourth players” on the TReDS platform in addition to MSME vendors, buyers, and financiers after the new proposals.
• In order to conduct factoring activities on the TReDS platform, the plan calls for all businesses and institutions covered by the Factoring Regulatory Act to participate as financiers.
• In order to allow financiers to transfer their invoice portfolios to other financiers on the TReDS platform, TReDS will now provide secondary market operations.

New proposals and their benefits for MSMEs

• The choice to add insurance companies as a fourth partner will encourage lenders to place constraints on purchasers with low credit grades by broadening the scope and audience of the TReDS platform. 
• These new proposals will benefit numerous MSMEs that are supplying a variety of customers. Additionally, allowing secondary market activities will let financiers release their capital and engage in ongoing invoice discounting on TReDS, ensuring that they have enough liquidity to do so.
• The new proposals and initiatives are anticipated to assist MSMEs in gaining access to sufficient working capital and facilitate small enterprises’ easy access to cash before customers purchase goods and services.
• Businesses would be able to plan and carry out development and growth projects if they had quick and simple access to liquidity.

TReDS Platform’s Potential to Help MSMEs in managing Working Capital

TReDS experts advised MSMEs to investigate using the platform to obtain funding. With the help of the platform, MSMEs can obtain funds in advance, handling any concerns with working capital and improving the management of their companies. Discounting receivables might be a valuable source of capital for cash-strapped MSMEs because it is an off-balance sheet transaction, according to the centre.

• Using the TReDS platform, small businesses can auction off their trade receivables to raise operating cash.
• An MSME’s bill (trade receivable) is put up for bid by a financier or bank before the due date or before the buyer pays.
• The TReDS platform is an excellent approach for MSMEs to handle their liquidity requirements.

Conclusion

Around 45,000 MSMEs are registered as vendors on the TReDS platform, which has grown by more than 100% CAGR over the last five years. The new proposal from the RBI was eagerly awaited. When they are implemented, they will encourage financiers to participate more in TReDS by enabling Trade Credit Insurance for a variety of buyer pools and secondary market operations, which will mobilise financiers’ current portfolios and support financiers in releasing their funds to support ongoing disbursements on the TReDS platform. The MSME ecosystem will benefit from an inflow of money, mainly from the latest RBI new proposals.

Also Read:
Benefits of MSME Registration in India
Detail Explanation about MSME Registration Process & Who Need to Register?