The Government of India has taken various initiatives to support MSME’s for their growth and development. Although ministry has been putting earnest efforts for effectively implementation of these policies and programmes, but the basic constraints that MSME entities faced are financial crunch.
MSME entities do not have very strong financial strength ,in such scenario even when MSME bagged any project as a supplier they do not have enough fund to get the raw materials and when they are buyer they do not have enough money to pay for the other party.
Almost all MSME’s faced such financial crisis specifically in terms of working capital and to address this issue the Government of India in collaboration with the Reserve Bank of India (RBI) has development a mechanism whereby MSME’s can get financial support through simple process.
What is TReDS?
Trade Receivables Discounting System (TReDS) is an institutional mechanism whereby three parties Buyer, Supplier and Financier come together on an electronic platform to resolve financial issues for MSME’s. This mechanism basically includes financing of Trade receivables of MSME from corporates and other buyers including Government department and public sector undertaking (PSUs) through multiple financiers like banks.
Advantages of TReDS
- Hassle free online process to procure finance for MSME’s.
- Availability of buyer, supplier and financier at one platform.
- Paper less transactions.
- Collateral free working capital for MSME’s.
- Financiers can fulfil their “Priority Sector Lending” (PSL) targets efficiently in less time.
- Confidence of parties in the mechanism, being regulated by RBI.
- Easy data and record management etc.
How TReDS works?
TReDS mechanism operates on bill/invoice discounting process. It can be classified in two ways:
- Factoring
- Reverse Factoring
What is Bill Discounting?
The whole concept of TReDS works on Bill discounting mechanism. Bill discounting is a process whereby buyer/supplier can discount their invoice before the actual due date of payment/receivables to gain access to financial assistance and working capital requirements.
As mentioned above, Bill discounting can be done through Factoring and Reverse Factoring. Both methods facilitate financial needs of MSME.
Example:
Below given is an illustration as given on TReDS platform ‘M1xchange’
Suppose, a business man sold goods to Mr.X worth Rs 10,000 on credit but Mr.X does not have the money to pay today, but he is certain to pay on a later date, after two months, so the bill is raised stating Mr.X to pay Rs 10,000 after two months. But an urgent need for funds is required by businessman, and he can’t wait for two months, there by he discounts this bill with his bank/Bill discounting company two months before its due date @ 15% P.A rate of discount. Now the bank pays the drawer an amount of Rs 9750 after deducting an applicable commission of Rs 250.
Businessman (drawer) sold goods and also got paid without having to lose either his customer or the business. Mr. X got the goods not having paid today, and the bank made a good commission.
TReDS Platforms in India
RBI has granted licence to three platforms to act as TReDS platform:
- Receivables Exchange of India Ltd (RXIL)
RXIL is the first entity to receive the approval from RBI on December 01, 2016 to launch India’s First TReDS Exchange.
Receivables Exchange of India Ltd (RXIL) was incorporated on February 25, 2016 as a joint venture between Small Industries Development Bank of India (SIDBI) and National Stock Exchange of India Limited (NSE)
- M1xchange
M1xchange was launched on 7th April 2017 to service the finance needs of MSME across India.
The exchange has hosted Nationalised, Private and Foreign banks to finance these receivables at most competitive rates with a unique model of bidding by the banks.
- Invoicemart/A.TReDS
Invoicemart received the license for the platform on June 29, 2017, and started operations on July 5, 2017.
A. TReDS Ltd. is a JV between Axis Bank and mjunction services.
Factoring
In factoring method supplier after supplying goods raises the invoice and upload the invoice on portal as “Factoring unit.” Buyer on the same platform will vouch for the same. After verification, financiers will bid for “Factoring unit” and supplier will choose for the best bid as suited to him. After selection of bid, the system will generate instructions for the financier to make payment in T+1 day and subsequently debits the Financiers account and credit the suppliers amount with agreed bid amount. Further on due date of the invoice instructions are generated for debiting the buyer and crediting the Financier.
Reverse Factoring
Process of reverse factoring is same as factoring as mentioned above but in reverse factoring invoice is floated by Buyer instead of supplier. Supplier verifies and approve the same and thereafter bid process takes place.
Ministry of Micro, Small And Medium Enterprises vide its notification dated November 2,2018 issues instructions that:
- all companies registered with the Companies Act, 2013 with a turnover of more than Rs. 500 crore (rupees five hundred crore) &
- all Central Public Sector Enterprises
shall be required to get themselves onboarded on the Trade Receivables Discounting System platform, set up as per the notification of the Reserve Bank of India.
Thus corporates are required to complete their registration on TReDS platform to support the growth and development of MSME in our Country.
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