TReDS: The Trade Receivables electronic Discounting System

• 5 November 2019 | 2509 Views | By Mint2Save

Trade Receivable Discounting System (TReDS) is an online platform for the purpose of facilitating the financing process of the trade receivables of Micro, Small and Medium Enterprises (MSMEs). This was launched owing to the fact that MSME’s suffer from the lack of payments for the goods and services they provide. Thus, the trade receivables do not get converted into the much needed liquid funds. This is a critical problem. MSMEs have become an important part of the Indian economy. 

Invoice discounting has been a relatively newer term in the world of finance for SMEs and has caught attention of several startups, banks and regulators as a medium to deliver liquidity solutions. Unlike retail businesses, payment realization in MSMEs do take upto -45- days or more. Invoice raised, but not yet realized, can now be discounted with the banker to meet immediate liquidity needs of the MSME and keep the business going smooth.

This mechanism was introduced in 2014 by the Reserve bank of India (RBI). This concept was recommended by the Financial Sector Reforms (FSR) Committee in 2008 in the report by the name “Hundred Small Steps”. Thus, MSMEs, corporate buyers, and other financiers can have a network on a common platform. As per the guidelines of the RBI, MSMEs can participate as sellers and NBFCs, banks and corporations are the one financing. 

Sundeep Mohindru, CEO of M1xchange, one of the TReDS platforms, calls this a “God Sent” for MSMEs, and truly so. Here, on this platform, the rate of interest can be down by 8-9%. This is very competitive compared to the traditional existing rate of 12-18%. Since there is a larger corporate that is operating, interest rates are lower. Such a commercial model has brought down costs for MSMEs by 5-6%. 

TReDS benefits – 

1. Availability of finances at better rates
2. TreDS portal is an online platform, thus there is paperless documentation and work
3. Faster process of discounting 
4. Better relationships between the players on this platform
5. Transparency
6. Standardized practices
7. The discounting does not reflect as borrowing in the books of MSMEs. So, their working capital limits do not get shrunken by the process. Thus, it is called an “off-balance sheet finance”.
8. A delay in payment does not impact the MSME. The bank buys the receivables from the MSME and takes over the risk from them. So if the corporate does not pay, it is resolved between the bank and the corporate, and not the MSME.

Parties on the TReDS platform – 

Though there are many agents involved such as software companies, data management teams, department of taxes, the following parties are the main interacting parties on any TReDS platform:

– MSME sellers

Supplying goods or services to buyers, further as defined under the MSMED Act, 2006

– Buyers

Buyers in an MSME involved business can vary from corporates, governments, government run companies, individual buyers and even other MSMEs. 

– Financiers 

While banks are the most preferred form of financier in TReDS financing, several new age NBFCs are also aggressively turning up. With competitive rate of interest, no or less processing fee and smooth transaction process over the internet, TReDS platforms are sure to have sufficient supply of money for almost every bill that turns up for bidding based discounting. 

TReDS Platforms: – 

In 2017, the RBI issued licenses to three TReDS platforms – 

1. M1Xchnage (promoted by Mynd Solutions Private Ltd.)
2. RXIL (Receivables Exchange of India Ltd, a joint venture between Small Industries Development Bank of India and National Stock Exchange of India)
3. A.TReDS  (a joint venture of Axis Bank and mjunction services)

Further developments – 

• In 2017, the Central government had made it mandatory for PSUs to register on the TReDS platform. However, it has been argues that the process of approving an invoice is a long one in the case of PSUs. In these scenarios, banks do not fund the invoices. This becomes problematic to the very concept of the platform. 
• In November 2018, Prime Minister Narendra Modi announced that companies that had a turnover exceeding Rs 500 crore, will have to get them registered on TReDS so that cash flows can be smoothened for MSMEs.
• RBI has classified banks’ functions under this platform under Priority Sector Lending (PSL). 
• Banks have equal business opportunities on the TReDS platform, irrespective of their function and size. 

TReDS success: 

FY 2017-18 Total Business = Rs 800 crore approximately

FY 2019 Total Business = Rs 7000 crore

• In 2018, the TReDS was linked to the GST Network (GSTN). This was done to increase the usability of the platform, remove the hurdle of any fake bill, and thus boost the potential of the MSME market. Such access to information on cash flows will help smaller businesses get cheaper interest rates. 
• The invoices uploaded will receive authentication from GSTN, thus furnishing more information about the MSMEs to banks and financiers. Creditworthiness can be assessed and financiers get assured that the invoice bills are authentic.
• The government has mandated disclosure for all companies that have links to MSMEs for over 45 days. This is done to increase transparency and improve liquidity. This is being viewed to solve the nonpayment or delayed payment problems via the platform.
• The law provides an agreement between the sellers and the buyers. As per the agreement, the corporate is bound to make the payment within 45 days. If the buyer has failed to pay the due amount, it has the liability to pay compound interest to the supplier from the appointed day, or as per the date agreed on, at three times the Bank Rate as notified by the Reserve Bank of India. 

Working of the TReDS platform, supported by data as per RBI – 

1. Register on any one of the TReDS platforms. 
2. MSME seller receives a purchase order. This is an indication by the corporate buyer that there is an intention to buy
3. MSME delivers the goods. An invoice is generated. Further, the process is carried on whether or not there is a bill of exchange between the seller and the buyer.
4. Against either the invoice or the bill of exchange, the MSME will approach the TReDS registered platform and create a “factoring unit”. This “factoring unit” is accepted by the logged-in buyer in the TReDS platform. 
5. TReDS will now standardize a time window that would be available for the corporate buyers to accept the factoring units. This time window is based on the invoice or the bill of exchange.
6. The MSME seller may then decide to upload documents on the platform to support the fact that there has been a movement of goods. 
7. TReDS will create modules that are separate for transactions with invoices and those with Bills of Exchange.
8. Each factoring unit in these separate modules will have the enforceability as allowed for physical instruments under the “Factoring Regulation Act, 2011” or under the “Negotiable Instruments Act, 1881”.
9. Each factor unit represents an obligation from the buyer to pay. This unit consists of – info of the buyer and seller, issue date, due date, the amount that is due, etc.
10. After the factoring unit and other details have been generated, a notice is created and automatically sent to the buyer’s bank.
11. Now, the financiers registered on the TReDS platform can finance or bid for these factoring units. The final amount that will be quoted by the financier on the platform will only be viewed by the concerned sellers and no other financier.
12. A window period is set against these factoring units for the financiers. This is for quoting bids. However, financiers can choose for how long their bids will be valid. 
13. The MSME seller then chooses and accepts any bid. Subsequently, the financier receives this notification of acceptance.
14. Once the MSME seller accepts the bid, the financiers cannot revise or change their bid.
15. The factoring unit is tagged as “financed” and the funds are transferred in the MSME seller’s account. 
16. Financing by a financier party generates a notice for the buyer’s bank to give way for a direct debit from the buyer’s account to the seller’s account on the due date.
17. On the due date, the amount is transferred from the corporate buyer. In the meantime, the TReDS platform is on the task of sending notifications to corporate buyers and their banks reminding them of the amount due.
18. If the payment is not made by the due date, the same will attract penal provisions against the corporate buyer. 
19. These instruments are subsequently rated by the TReDS platform and may also further be transacted or discounted among financiers who are in the secondary segment on this platform. 
20. Trade that takes place in the secondary segment has the same process, as there is a direct debit from the buyer’s bank.
21. If a factoring unit is left unfinanced, the corporate buyer pays the seller outside the TReDS platform. 

Digital Lending Startups Based on TReDS

1. KredX: Incorporated in 2015, Kredex aims to sort out short term working capital requirements by providing finances over local digitized invoices. Being dependent on digital process, the loans are entirely secured by the digital receipts, and thus no collateral is involved.

Post registering on the startup, availing finance on KredX is a three step process:

(a) Raising the Invoice: SME makes a sale, and raises an invoice, which is repayable within a tenure of 30-90 days.

(b) Uploading of Invoice: The business / MSME can upload the invoice of the sale made to the KredX portal.

(c) Approval of Loan and Disbursement: The invoice raised gets financed by an external investor and the approved invoice value is disbursed to the respective account of the business within a tenor of 24 hours to 72 hours.

This whole process can also be referred to as receivable factoring.

2. Invoicemart: Invoicemart is hosted by A.TReDS, a joint venture of Axis Bank and mjunction.  While Axis Bank is a well known scheduled commercial bank, mjunction has been instrumental in the area of e-commerce and is known for creating world’s largest emarketplace for steel.

Apart from offering the conventional process of receivable factoring, these startups have taken a step ahead and are also financing on reverse factoring, where the buyer can upload invoice to get it approved and pay the seller on financed received.

Next Agenda

Easy solutions to supply chain finance is the need of the time SME / MSME segments. SME sector, is multifarious in its very origin. It covers software solution firms to small scale handicraft industries, textile to iron and steel industries. For most manufacturing SMEs, finance over trade receivables has been a herculean task.

Fear of fraudulent bills, lack of communication among banks, and internet based infrastructure has obstructed the banks from extending credit to customers.

With advent of TReDS, verification of bills / receipts has become an easy task. Further, mapping via Goods and Services Tax Numbers has also enhanced confidence of banks in taking exposures. Further for MSME’s, availability of capital at reasonable interest rates is now a possibility, otherwise, borrowing from non-institutional lenders at higher interest rates has always been a slow poison for them.

Private power producers have urged the government to consider the extension of the TReDS platform to them, in order to solve their payment problems which amount to around Rs 41,240 crore. The stress is created due to the delay in the recovery of receivables. This has restricted liquidity. 

Dues from the sale of power = Rs 17,246 crore

Dues from litigation = Rs 17,128 crore

Pending receivables = Rs 6,865 crore

The ultimate problem as a result – stacking NPAs and restricted liquidity. Matters are pending before the Supreme Court and thus, it is urged to the government that a platform similar to TReDS be made also for the power sector.

Educational programs for both MSMEs and corporate to increase awareness and knowledge about the system. This is primarily to avoid a lack of cash flow being a deterrent to business. RBI plans to organize workshops on the TReDS platform to create more awareness among the bankers for greater financial inclusion of MSMEs. 

TReDS is a open call from the regulators and the government to show importance of fintech when it comes to MSME. One can observe the number of fintech players with easy and innovative solutions, collaborating with banks to provide funding solutions.

Thus, digitization has paved the way for better working and further plans are on way for improvement.