MSMEs have been facing the problem of delayed realization of their bills and receivables since long, particularly from large corporate buyers and government organizations.
MSMEs often suffered greatly from delayed payments from customers. Since small businesses require regular cash flow to stay operational, deferred payments, usually from large corporate customers, seriously threaten their operations.
Currently, the payment recovery cycle falls above 90 days for a majority of MSMEs and payment delays become a huge problem for business continuity of such enterprises.
The Micro, Small and Medium Enterprises Development Act, 2006, has made provisions to mitigate the problem of delayed payment, whereby any buyer who fails to make payment to MSMEs, as per mutually agreed terms or a maximum of 45 days, would be liable to pay monthly compounded interest at three times the bank rate notified by RBI.
At the time of the enactment of the MSMED Act in 2006, it was felt that the aforementioned provisions would prevent buyers of MSMEs’ products from committing payment defaults, but in reality very few cases were brought to the facilitation centers as MSMEs feared losing out on business.
Government has also launched MSME SAMADHAN Portal (https://samadhaan.msme.gov.in/) which is a delay payment monitoring system and aggrieved MSME can file their case in the site for delayed payment from the corporate buyers including government departments, PSU etc.
But again the poor MSMEs fears to report the defaults in order to not lose out on a business relationship from the big players.
As per a recent report (statement by Hon’ble MSME minister), Central, state governments, government-owned companies and the private sector owe small business outstanding dues worth above Rs 5 lakh crore. Further as a report, almost 30% of the dues are over 120 days, 45% are between 60 to 120 days and rest below 60 days. But report related to pending amount filed by MSMEs in the ‘Samadhaan Portal’ is Rs 15,195 Crore only (as on date), reasons need to be investigated further.
To alleviate the hardship faced by the MSMEs across the country in getting timely payment of their dues from the buyers (mainly corporate), RBI in May 2017 had launched an online bill-discounting platform called Trade Receivable Discounting System (TReDS) to give routinely cash-strapped MSMEs a way of raising funds by selling trade receivables from Corporates.
Despite of 3 years of inception of this system, TReDS is still struggling to gain popularity and to reach out to all MSMEs across the country. Though silver lining is that due to RBI and government effort, TReDS in FY2017-18, did a business of about Rs 800 crore, which further increased to approximately Rs 7,000 crore in FY 2018-19 and to Rs 11,200 crores in FY 2019-20.
The present article will discuss about the TReDS, its operation, present scenario, bottlenecks/challenges and future ahead.
What is a TReDS?
Trade Receivable Discounting System “TReDS” is an online platform being set up under the approval of Reserve Bank of India (RBI) to facilitate online discounting of invoices/receivables and Bills of Exchange on a PAN India basis.
It is a digital platform for MSME Suppliers to auction/ discount their trade receivables at competitive rates through online bidding and get instant payment directly to their account.
At present, three companies are registered with the Reserve Bank of India for operating as a TReDS Platform:
- Receivables Exchange of India Ltd (RXIL)- rxil.com – a joint venture of the National Stock Exchange and SIDBI
- TReDS Ltd (Known as Invoicemart)- www.invoicemart.com – a joint venture of Axis Bank and mjunction services.
- M1 Xchange – m1xchange.com – a MYND Solution company- based in Gurugram
Parties involved in this system:
MSMEs (Seller or Supplier), Corporates including PSUs and Govt. department (Buyers) and Banks/ FIs/ NBFCs (Financer).
It brings together the MSME Suppliers, the Buyers (i.e. Corporates, Government Departments and Public Sector Undertakings) and the Financiers (i.e. Banks, NBFCs and Financial Institutions) for facilitating uploading, accepting, discounting, trading and settlement of invoices/bills of exchange of MSME Supplier on T+1/ T+2 days basis.
TReDS platform conducts KYC, sign master agreement and Onboard all the three parties. All the three parties need to open a designated Bank account for TReDS and provide auto debit mandate to the settlement bank of TreDS partners (RXIL, Invoicemart & M1Xchange). The Financiers also needs to assign limits to the Buyers of the platforms based on internal risk assessment on the Buyers.
Objective of TReDS
- To provide MSMEs hassle free payment / Cash flow at competitive rates through an open bid process through multiple financiers.
- Providing access to working capital and reduced cost for MSMEs. This will improve the liquidity in the MSME sector significantly.
How it works?
First of all the parties involved need to register themselves into the portals of any of the three TReDS partners. All the three parties must be register with a common partner’s viz. RXIL, M1Xchange or Invoicemart. Maximum of the Financiers have registered themselves in all the three exchanges. So, MSME seller can choose the platforms as per their needs or can register in all the three.
MSME supplies goods or services to the large Corporates, Government department, PSU etc and raised a bill/invoices for payment. Generally the invoices are paid to the supplier/seller in a given due date says 60 days/ 90 days or even more. But for a smoother operation, MSME unit needs a regular cash flow.
Buyer or large Corporates accepts the invoices raised by the supplier in the TReDS platform. The process is called Factoring and the reverse process where Buyer uploads the invoices and MSME accept it, is called Reverse Factoring. After acceptance of the invoice by counterparties, it becomes a Factoring Units and it goes for online auction in the TReDS platform.
The financer bid for the receivables and enter the discounting rate. After the successful bidding, supplier/seller accepts the discounting rate for receiving quick payment of the receivables.
After the approval from seller, the financer account gets debited for the final payment (after discounted rate) to MSME a/c on T+1 or T+2 days of successful completion of bidding.
On due date of invoice, the Buyers (Large Corporates) account’s get debited and corresponding Financer account credit to make the transaction complete.
TReDS Process flow:
Operational details of TReDs
Market timings of Auction are 9 a.m. to 9 p.m. every day.
Cut Off time is- 4.00 p.m., if bid is accepted before it, then the settlement will be on T+1. After the cut off time, the settlement will be on T+2 (Bid Acceptance Date + 2 working days).
If the factoring unit is not accepted by anyone on TReDS portal for auction, then buyer will pay directly to seller outside the portal.
Costs involved in financing are
- Interest Cost paid by buyer/seller as may be decided by them mutually.
- Transaction charges to TReDS for factoring.
Benefits of using TReDS
- Unified electronic platform for Sellers, Buyers & Financiers.
- Easy & fast working capital finance for MSMEs at cheaper interest rates.
- Without recourse/ non-collateral based finance for MSMEs
- Liquidity improves for MSME as there is easy/quick access of funds.
- Saving on procurement cost of corporate buyers through improved negotiation of financing terms for suppliers.
- Security of digital platform for confidentiality of information.
- Financiers can get benefit of PSL (Priority Sector Lending) by financing the receivables of MSME seller.
- Financiers get access to a large clientele of MSME customers and corporate customers
TReDS- a boon for MSMEs in the present COVID pandemic:
As MSMEs reel under the impact of the lockdown, access to capital becomes essential to manage liquidity in the ups and downs of the business cycles. Quick conversion of trade receivables has become easier after implementation of TReDS and is crucial for an MSME’s survival.
With TReDS platforms, small businesses can have direct access and meet working capital requirements on demand. MSMEs on-boarded on the TReDS platforms have the flexibility to select invoices to finance when in need of capital and receive cash within a matter of 2 days of accepting the bid by their buyers.
With social distancing norms and safety will continue in the near future, businesses could not afford to continue in traditional ways. Enterprises should not compromise with the safety of its employees running for documentation and cash management to Banks/FIs.
With the thrust on Digital movement by the government, MSMEs can go online to safeguard their employee as well as business. Suppliers just need to go through one-time digital documentation and on-boarding to gain access to discount invoices raised against all registered corporate buyers on the platform.
Suppliers can log in to platform site from their systems to initiate transactions, review and accept bids, and receive funds directly in their accounts at the click of a button.
MSMEs can also get advantage of competitive discounting rate on the platform as almost all the Banks will be bidding for the invoices further with the approval of government to allow NBFCs in TReDS, MSME is going to benefit further. Suppliers can avail the benefit with interest rate starting as low as 7% to 8.5% or even lower.
Further, financing receivables through TReDS is without recourse to MSME and even without any collateral security.
The settlement of the invoice is done between the buyer and the financiers. Banks/ NBFCs provide a limit (based on internal risk assessment) to the buyer for this receivable financing which is debited for immediate payment to the supplier. On due date, buyer need to repay the invoice amount to the Financier.
Non-payment by the buyer on due date to their banker amounts to a default and attract penal provisions and enable the banker to proceed against the corporate buyer. However, on buyer’s request, Bank’s may provide extension of time or additional Credit period for payment.
Challenges / Bottlenecks
- Despite Government push by making mandatory for CPSEs (Central Public Sector Enterprises) and other corporate above Rs 500 Cr turnover to register with TReDS and start using it for vendor payment, large numbers of buyers have still not joined the TReDS.
- Several corporate/CPSEs have joined, however just for compliance purpose & not using it for vendor bill discounting.
- Out of approx. 63.4 million MSMEs in our country, less than 1% is registered with TReDS. MSME sector, particularly micro-enterprises, is yet to utilize the TReDS platform to its full potential.
- Only 133 of the 255 CPSEs mandated by the government had registered on the platform as on date (sambandh.msme.gov.in data), despite the government mandatory instructions on compliance on various occasions over the past year. Further, many CPSEs have registered themselves only for the compliance and are not regularly transacting in the platform.
- Ignorance/ Lack of awareness at MSME level about the TReDS despite efforts by Government & TReDS platforms through various channels.
- Invoice approval and acceptance process with Govt. Department/ PSUs takes longer time and sometimes it reached the invoice due date thereby leaving no or little time for discounting of receivables on TReDS platform.
Way forward for TReDS
- Continuous government support and awareness can go a long way in countering the challenges being experienced. The government has taken several initiatives recently to boost the TReDS exchanges.
- Ministry of Micro, Small & Medium Enterprises, vide its Notification dated November 02, 2018 has mandated all companies (Large Corporates) registered under the Companies Act, 2013 with a turnover of more than Rs. 500 Crore (Rupees five hundred crore), and all Central Public Sector Enterprises (CPSEs) to get themselves registered on the TReDS Platform to ensure cash liquidity for MSME Suppliers.
- In a recent meeting, PMO has strictly advised all the CPSEs to complete the mandatory on boarding of the vendor onto TReDS. Further, these CPSEs have also been asked to submit the compliance report to the Department of Public Enterprises (DPE) by August’2020. Moreover, ministries exercising administrative controls over these Corporates have been also asked to monitor the progress and ensure compliance within the new deadline.
- Additional Secretary, DPE has also state that, “In order to enable the MSME suppliers to avail the benefit of TReDS portal, the CPSEs will ensure that after the delivery of goods or rendering of services, the decision on acceptance /rejection of the goods/ services and the respective bills/ invoices will be taken within 15 days` of the delivery of the goods/rendering of services”. This is in line with Section 2 (ii) of MSMED Act, 2006, wherein it is provided that in case no objection is made by the buyer regarding acceptance of goods and services within 15 days from the date of delivery of the goods/ rendering of services, it would be treated as “deemed acceptance”.
- This turnover criterion may be further lowered, infact all the big corporate and business must join TReDS and strict government monitoring should be in place to pay invoice only through online TReDS platform, will definitely popularize the scheme and resolve the perennial issue of liquidity problem amongst MSMEs.
- The Cabinet approval on 20.08.2020, to allow all NBFCs to give discount loans to MSME, is among one of the series of measures taken by the Government to ease the cash flow to MSMEs amid global pandemic
- SIDBI has set up a fund to support free on-boarding for micro, small and medium enterprises (MSMEs) on trade receivables discounting system (TReDS). Exchange Partners RXIL, Invoicemart & M1xchange are offering free registration to MSME unit for on-boarding in TReDS platform till 30.9.2020.
- All advances under TReDS are categorized as Priority Sector Lending for banks who participate, thus widening scope of PSL finance. Banks/NBFCS/ FIs have also developed and marketing this product to on-board Corporate and MSME client to their fold to maximize their share of PSL and strengthening customer base.
- Advertisement on various channels such as Television, Radio and social media by RBI to educate MSMEs and Corporates about the benefits of TReDS.
- Many of the Banks/NBFCs are running various awareness programme, MSME connect programmes, Webinars etc to create awareness among the MSMEs to maximize the use of TReDS platform.
- The phenomenal growth of business in TReDS platform over the years is showing a positive sign in popularizing the scheme. However, the Covid pandemic has halted the growth, but again, it is a temporary phase and is expected be over within sort span of time. Further, the aggressive marketing of the TReDS partners to on-board maximum of MSMEs and Corporate Buyers and Financiers will mark a success in future. Major PSBs like SBI, UBI, BoB, PNB etc have joined hand with these three platform partners to provide hassle free discount loan to MSMEs.
“Views and opinions expressed in the article are mine and not of the Bank”.