TReDS is an online platform for facilitating the financing of trade receivables of MSMEs from corporate buyers through multiple financiers.
Factoring business requires more digital infrastructure, information confidentiality and recourse mechanisms amid the push it has received through the Trade Receivables Discounting System (TReDS).
With more banks and public sector institutions coming on board along with Goods and Services Tax (GST), the next 12 months will be a game changer for the micro, small and medium sector enterprises (MSMEs), says Tushar Buch, MD and CEO, SBI Global Factors Ltd, the leading factoring business player in the country.
Factoring is a financial transaction where a seller of any goods or services sells its invoices to a third party (called a factor) at a discount, also called as bill discounting, to get upfront payment.
TReDS, set up as per RBI guidelines in 2014, is an online platform for facilitating the financing of trade receivables of MSMEs from corporate buyers through multiple financiers. It enables discounting of invoices of MSME sellers raised against large corporate, allowing them to reduce working capital needs.
Buch says TReDS has helped in better price discovery, more availability of funds for MSMEs and will also bring in more early warning signals on the cash flows.
The online factoring on TReDs including the two other large players including SBI, Canbank Factors and IFCI factors account for about 350 crore of turnover.
“We would be doing close to Rs 150 crore of that. This is as small as around 5 percent of the total turnover including offline,” Buch said.
Estimates suggest the total factoring business, started in India in 1991, including online and offline for factoring companies would be about Rs 12,000-15,000 crore and including banks (who also facilitate factoring) it would be about Rs 30,000 crore.
He said, “The GSTN (GST network) will help check the authenticity of the invoices and E-way bill, which is online reporting of movement of the transactions, will further push the TReDs platform with the digital storage of information…This further requires tremendous amount of digital infrastructure, more confidentiality needs to be looked at and this could be supported with the blockchain technology coming in.”
Even as companies gradually accept the TReDS platform, Buch says more can be done with respect to recourse mechanisms in case of a default by the buyer and also credit insurance can be looked at. “The due diligence process is very long and hence the companies might be taking time but it will happen.
He expects the way MSMEs do business to change in the next 12 months as there is Rs 23 lakh crore credit gap in the MSME funding at present.
As per RBI data, the outstanding loans to the MSMEs stood at Rs 4.71 crore as on mid-January 2018, micro and small enterprises grew by 6.9 percent while lending to medium sized enterprises showed a negative growth of -6.3 percent. Under priority sector lending, the credit to micro and small businesses increased by 10.2 percent.
Receivables Exchange of India (RXIL), M1Xchange and Invoicemart are the three platforms authorized by the RBI to facilitate TReDS.
In his Budget speech on February 1, Union finance minister Arun Jaitley announced bringing on board more state-owned banks at TReDS platforms and linking them with the GST Network. This was in addition to the tax sops and credit support, capital and interest subsidy that were announced for MSMEs.
Most banks including the biggest State Bank of India, Bank of Baroda, Union Bank of India, IDBI, Dena Bank, Allahabad Bank, Oriental Bank of Commerce and Vijaya Bank are already on board. Kotak Mahindra Bank and Yes Bank are among the private banks while DBS and Standard Chartered are the foreign banks on board.
About 34 private firms have come on the platform and large government-owned firms which are on it are Shipping Corporation of India, Bharat Electronics Ltd and Kudremukh Iron Ore Company Ltd as many more are in the process of coming on board.With almost 60 percent of our exports coming from MSMEs, Buch expects TReDS can also play a major role in growing our exports once the domestic factoring business stabilizes.