To boost the MSME sector, it was crucial to offer them timely finance irrespective of the loan ticket size, keeping in mind their ability to provide collateral and their credit score. Countering this widespread issue, the Reserve Bank of India (RBI) launched the Trade Receivables Discounting System (TReDS). TReDS platform enables registered MSMEs to raise recourse-free financing against their invoices raised on registered buyers within 24 hours.
TReDS is an electronic bill discounting platform regulated by the RBI framework and a joint venture between SIDBI and NSE to provide MSMEs instant payments for outstanding trade receivables. Numerous past policies and measures undertaken by the RBI were directed to provide a broader range of MSMEs with seamless access to funds.TReDS bill discounting platform took off to a great start, showing significant growth in invoice discounting. Over time, RBI has been strengthening the TReDS ecosystem and encouraging all participants, in turn, to support small businesses to meet their working capital requirements through the digital ecosystem.
However, there was a need to increase the purview of the TReDS platform to boost the receivables market for MSMEs. NBFCs and Insurance corporations were needed under the umbrella to enhance the liquidity on the platform as well as the reach and impact.
The latest development in this regard came on February 8, 2023, when RBI expanded the scope of TReDS in the Governor’s Monetary Policy Committee (MPC) speech.
Here are the key highlights of the announcement:
●TReDS platform will allow insurance companies to act as ‘fourth participants’, other than MSME sellers, buyers, and financiers.
●The proposal calls for all entities and institutions under the Factoring Regulation Act to participate as financiers for undertaking factoring operations on the TReDS platform.
●TReDS will now enable secondary market operations – enabling financiers to transfer their invoice portfolios to other financiers on the TReDS platform. The decision to expand the scope and reach of the TReDS platform by introducing insurance companies as the fourth participant will encourage financiers to allocate limits on buyers with lower credit grade. This will aid a significant number of MSMEs who are supplying a mixed bag of buyers. Also, allowing secondary market operations will support financiers to release their capital and engage in continuous discounting on TReDS, thus ensuring adequate liquidity to financiers to support invoice discounting on TReDS.
The new initiatives are expected to help MSMEs get access to adequate working capital and help small businesses seamlessly access cash before the customers make payments for goods and services. Easy and timely access to liquidity would also enable businesses to plan and execute expansion and growth projects.
The TReDS platform has grown by more than 100% CAGR in the last 5 years and currently has over 45,000 MSMEs registered as sellers on the platform. The RBI’s new policies were much anticipated, and as the guidelines will come into effect, they will encourage financiers to increase their participation in TReDS by enabling Trade Credit Insurance for diverse buyer pool and secondary market operations, which will mobilize existing portfolios of financiers, supporting financiers to unbind their funds for aiding continual disbursements on the TReDS platform. The new RBI proposals will aid in the infusion of liquidity into the MSME ecosystem.
The writer is MD and CEO of TReDS platform RXIL.
