Extending the Boundaries of TReDS

Trade Receivables Discounting System, or TReDS, is an electronic platform used to discount the trade receivables of MSMEs. It is an authorized payment system and is also subject to the oversight of the Reserve Bank of India under the Payment and Settlement System (PSS) Act 2007.

Trade receivables are the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payments. These receivables may be owed by businesses and other buyers, such as public sector organizations and government bodies. MSMEs are the ones who always face liquidity crisis. They do not have huge capital like big corporates. To provide MSMEs with immediate funds, the TReDs platform was introduced by RBI. So it was introduced to ease the constraints faced by micro small and medium enterprises in converting their trade receivables to liquid funds. Currently, 3 entities operate the TReDs platforms in the country they are,

INVOICEMART, RXIL, and M1 EXCHANGE.

Working of TReDS

First, the supplier (MSMEs) supplies goods or services to the buyer (Public sector undertakings or corporates) and then he logs in and uploads the invoice for receivables in the TReDS platform. The invoice is converted into factoring units which include the details of the payment date, the amount that has to be paid to the supplier, seller and buyer account details, etc. Now the invoice has become a factoring unit after entering into the TReDS platform. The buyer verifies and approves the invoices. After that, the financiers ( banks or NBFCs) bid against the factoring units. The supplier identifies those bids and accepts the most favorable one. Then the TReDS generates settlement instructions for debiting the financier and crediting the supplier. After the time period which is already decided by the factoring unit, settlement instruction is again generated from the buyer that the money is transferred to the financier. At this stage, the financier will get a profit which is the difference between the amount paid by the financier to the supplier (MSME) and the total amount received by the financier from the buyer of goods for taking the risk.

 In February 2023, RBI monetary policy committee meeting was held and as a result of this, a Statement on Development and Regulatory Policies was released. Through this document, RBI announce that it will enhance the TReDs guidelines and in June 2023 the RBI has brought out the enhancements.  Following are the enhancements made by RBI

1. Facilitate insurance for transactions

Financiers are paying MSMEs by taking the risk ie, they will get payment from the buyers only after a certain period. On maturity, if the buyer is not in the position to pay the amount then the financier has to bear the loss. On the TReDS platform, financiers submit their bids while taking the buyers' credit ratings into consideration. In order to address this, insurance is being made available for TReDS transactions, which will help financiers manage their exposure to default risk.

2. Expand the Pool of Financiers

Till now banks and Non-banking financial corporations that have got factor licenses are allowed by RBI to take part as financiers in the TReDS platform. The Factoring Regulation Act (FRA) of 2011 permits certain additional companies or institutions to engage in factoring operations. As a result, any organizations licensed to conduct factoring activity under the Factoring Regulation Act may now take part as financiers in TReDS. This would augment the availability of financiers in the TReDS platform and MSME will be able to get immediate cash.

3. To enable a secondary market for factoring units (FUs)

TReDs guidelines provide for the discounted or financed factoring units to have a secondary market which is however not introduced yet. According to their discretion and experience, TReDS platform operators may enable a secondary market for the transfer of factoring units inside the same TReDS platform

4. Settlement of Factoring Units, not Discounted/ Financed

TReDS platform providers may now handle the settlement of all factoring units to lessen the inconvenience of MSME sellers and buyers and for improved reconciliation. The timeline for fund settlement shall be subject to the provisions of TReDS guidelines as well as other relevant statutes like the MSME Development Act 2006.

 4. Display of Bids

TReDS platforms enable financiers to bid in a transparent and open manner. To make the process more transparent, the platforms may display details of bids placed for a Factoring Unit to other bidders; the name of the bidder shall, however, not be revealed.

These are the major enhancements announced by RBI in the TReDS platform.

Ms. Rajashree. V, Assistant Professor of Commerce, Al Shifa College of Arts and Science, Kizhattoor, Perinthalmanna