TReDS is an initiative taken by RBI to facilitate the refinancing and discounting of receivables for MSME sector of Indian economy. MSME plays an important role in economy, while being the backbone of modern-day trade. However, for smooth functioning of business it frequently faces challenges of fund raising to meet working capital financing, due to complex paper working of financial institutions. The TReDS facilitates the discounting of both bills of exchange as well as invoices. The underlying entities could be MSME and Corporate and other buyers, including Government Department and PSUs. To ensure higher volumes for price optimization, TReDS is enable to deal with both receivable factoring as well as reverse factoring.
NTREES – an online bill discounting platform, was being operated by NSE with SIDBI as a single financier since 2009. As followed by NAFIN in Mexico, NTREES was based on Reverse Factoring model. A concept paper was floated by RBI to launch Electronic Bill Discounting Exchange in 2013. RBI issued TReDS guidelines on December 3, 2014 and consequently, NSE and SIDBI jointly applied to operate the TReDS Exchange. NSE – SIDBI receives in-principle approval from RBI on December 2, 2015. An in-principle approval was given to NSE-SIDBI by RBI on December 2, 2015, following which RXIL was incorporated on February 25, 2016 and India’s first TreDs exchange was launched on January 9, 2017.
FUNCTIONING OF TREDS:
- Suppliers delivers the goods/services (outside TReDS).
- Supplier Logs in & upload the Invoice (Rs.1000).
- Validate invoice, convert to factoring unit & publish for acceptance.
- Buyer Logs in & accepts the Invoice (Rs.1000)
- Publish the factoring unit for bidding.
- Financiers bid against the factor.
- Accepts the Bids (% interest as best bid).
- Exchange generates the settlement File to debit Financier and pay Supplier.
- Exchange debits Financier’s bank account for Rs.900 and credit the supplier’s bank account.
- Exchange debits Buyer’s bank account for Rs.1000 & credits the financier’s bank account.
Reserve Bank of India authorized following three TReDS exchanges;
- RXIL:Receivables Exchange of India Ltd (RXIL) was incorporated on February 25, 2016 as a joint venture between Small Industries Development Bank of India (SIDBI) – the apex financial institution for promotion and financing of MSMEs in India and National Stock Exchange of India Limited (NSE) – premier stock exchange in India. RXIL operates the Trade Receivables Discounting System (TReDS) Platform as per the TReDS guideline issued by Reserve Bank of India (RBI) on December 3, 2014.
- M1Exchange: On November 24th, 2015, Reserve Bank of India (RBI) granted “in-principle” approval to three companies to set up Trade Receivable Discounting System (TReDS) platform. Mynd Solutions Pvt Ltd, is one amongst the three companies set up the TReDS platform ‘M1xchange’ on April 7th, 2017 under the Payment and Settlement System (PSS) Act 2007 to facilitate discounting of invoices and Bills of exchange for MSMEs on PAN India basis. M1xchange was launched on 7th April 2017 to service the finance needs of MSME across India.
- Invoice Mart: Invoicemart is a Trade Receivables Discounting System (TReDS) platform set up to resolve the credit challenges faced by MSMEs. It is promoted by A.TReDS Ltd. (a joint venture between Axis Bank and MjunctionServices), which received the license for the platform on June 29, 2017, and started operations on July 5, 2017.
The primary focus of TReDs is quick and easy working capital financing of suppliers through invoices and bills of exchange. Since an exchange is involved, process standardization is robust and there is no requirement of repetitive documentation with multiple banks. Moreover, the financing is off-balance sheet and is non-recourse for the supplier, providing even more flexibility.
The transaction is executed through a digital platform, which provides key information seamlessly. Such an operation reduces administrative costs and financing costs and provides better negotiations. Moreover, through the exchange the settlement and payments are done smoothly.
With the help of an exchange driven mechanism, the documentation and procurement cost is substantially reduced. Moreover, with the key information available, there is immense opportunity to build quality PSL asset portfolio in MSME space.
- One of the primary challenges faced by banks/financiers is unknown credit risk that is not covered in assessments. In recent past, credit risk has been becoming an issue for banks. This is becoming a reason for hesitation for more financiers to onboard the platform.
- As MSMEs do not have much recourse in the case of defaults, invoices to unknown buyers may not be accepted by financiers even as the platforms develop. This is because banks find it difficult to authenticate small business invoices and the secondary market will be small till volumes develop.
- Large companies are sometimes reluctant to be on these platforms for fear of competitors identifying their suppliers. Companies are also uncomfortable uploading suppliers’ invoices online as it means that they would have to be settled within the stipulated time period
TReDS meets the twin objectives of providing access to working capital and reduced cost for MSMEs. This will improve the liquidity in the MSME sector significantly. As of May 31, 2021, 1592 companies with an annual turnover of more than INR 500 crores have registered on the TReDs portal. Transactions worth INR 5600 crores were executed via M1 exchange in FY 2020-21, three times the number for the last three FYs combined. Such momentum amongst MSMEs showcases the pivotal role of TReDs mechanism in the digitized era of a post-covid world. Though challenges remain on the information and risk management fronts, the mechanism has gained much popularity in the last 18 months and continues to grow manifold.