Expanded scope of TReDS will improve flow of working capital credit to small businesses

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The Reserve Bank of India has proposed to expand the scope of the Trade Receivables Discounting System (TReDS), a framework introduced in 2014 to facilitate the financing of the trade receivables of micro, small and medium enterprises (MSME).

“It is now proposed to expand the scope of TReDS by (i) providing insurance facility for invoice financing; (ii) permitting all entities/institutions undertaking factoring business to participate as financiers in TReDS; and (iii) permitting re-discounting of invoices (that is, developing a secondary market in TReDS),” RBI governor Shaktikanta Das said in a statement on February 8. “These measures are expected to improve the cash flows of the MSMEs.”

By providing insurance facility on TReDS, the RBI has allowed insurance companies as the fourth participant on TReDS, in addition to MSMEs, buyers and financiers.

Here is a look at what platforms operators say and the views of MSME associations.

What TReDS platform operators say

According to Prakash Sankaran, CEO of Invoicemart, a TReDS platform promoted by a joint venture between Axis Bank and mjunction services, increasing liquidity on the platform is critical for scaling it up.

MSMEs discount their sales invoices on the TReDS platform to get early payments at competitive interest rates. TReDS platforms financed more than Rs 1.3 lakh crore worth of invoices since inception, benefitting more than 40,000 MSMEs, according to data shared by Invoicemart.

What platform owners want

Anurag Jain, cofounder of KredX, an invoice discounting platform backed by Tiger Global and Sequoia that provides working capital to MSMEs, said that while overlaying of dynamic discounting on TReDS platforms has enhanced participation, it comes at a cost to MSMEs and should be discouraged.

“The RBI should consider allowing invoice discounting for non-MSMEs as well with recourse to cover a large section of businesses that have to look for another financier for their invoice discounting needs,” said Jain.

View of MSME associations

MSME associations said the RBI’s recent announcement will lead to improved flow of working capital credit to small businesses by providing the added comfort of insurance and rediscounting facilities to financing institutions.

“This is a significant initiative undertaken by the Reserve Bank of India as this will address the issues of MSMEs’ working capital requirements as funds of MSMEs are stuck for long with companies, public sector undertakings and government departments. So this development will improve cashflows of MSMEs and expand their production horizons,” said Saket Dalmia, president of the PHD Chambers of Commerce and Industry.

What the number say

TReDS volumes have doubled over the past two years and nearly 45,000 MSMEs are registered sellers on TReDS, according to data shared by Stoxbox, a financial platform.

“This being an off-balance sheet financing for suppliers, it actually helps them by not increasing leverage on their balance sheets and provides room for large expenditure without breaking negative debt covenants,” said Manish Chowdhury, head of research at Stoxbox.

TReDS is an electronic platform that enables financiers to finance or discount the trade receivables of MSMEs. These receivables may be owed by businesses and other purchasers such as government agencies and PSUs. Major participants on TReDS are sellers, buyers and financiers.