TReDS – A boon for MSMEs
Micro, Small, and Medium Enterprises (MSMEs) play an important role in the development and growth of the economy of the country. The major issue is the adequacy of funds, particularly when it comes to converting their trade receivables into liquid funds. This disturbs their working capital and impacts the overall business.
In order to address this issue, the Government along with RBI has set up an institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate buyers through invoice discounting by multiple financiers. The concept paper for the same was published in March 2014.
An event for the final launch of the TReDS platform (Trade Receivables Discounting System (TReDS) in presence of Hon. Prime Minister of India is scheduled on 2nd November 2018 (4.00 p.m) at Vigyan Bhawan, New Delhi.
Companies with an annual turnover of more than Rs. 500 crore will have to mandatory register for the TReDS platform.
It will be governed by the RBI’s regulatory framework put in place for the same i.e. the Payment and Settlement Systems Act 2007.
What is TReDS?
Trade Receivable e-Discounting System (TReDS) is a mechanism for facilitating the financing of trade receivables of MSMEs through multiple financiers at competitive market rates through an auction mechanism. It a boon for MSMEs as it is the path to prompt encashment of trade receivables and elimination of credit risk.
It will support the MSMEs in the manufacturing as well as service sector as per the MSMED Act, 2006.
What are the salient features/benefits of the mechanism?
The salient features/benefits of the TReDS mechanism are
- Unified electronic platform for Sellers, Buyers, and Financiers
- Best discount rate as multiple financiers participate in the auction
- Liquidity improves as there is easy/quick access to funds
- It leads to better and efficient deployment of working capital
- Reduction in cost & paperwork
- Transactions are done online which increases transparency
Who are the participants in the TReDS mechanism?
There will be three direct participants in the TReDS mechanism :
- Corporate buyers (including the Government Departments and PSUs)
- MSME Sellers
- Financiers (both banks and NBFC)
All these participants will come together for facilitating uploading, accepting, discounting, trading, and settlement of the invoices/bills of MSMEs.
TReDS would allow buyers and sellers to avail of the facility after completion of KYC related requirements.
How does it work?
To put in simple words, TReDS is an electronic platform for factoring invoices or bill of exchanges which are issued by MSME sellers to large Corporate buyers for prompt realization. It will facilitate the discounting of the factoring unit(bills of exchange/invoices)by the financiers which will result in the flow of funds to the MSME seller and then settle the final payment of the factoring unit(bills of exchange/invoices) with the corporate buyer on the due date.
Step 1: MSME uploads the invoice or bill of exchange in the system.
Step 2: Corporate buyer accepts the invoice or bill of exchange on the system.
Step 3: Financiers (i.e. Bankers joining the platform) offer their bids/ discount rates against each factoring unit (invoice/bill of exchange).
Step 4: MSME seller accepts any of the bids auctioned by the Financiers
Step 5: The Financier (whose bid is accepted) would release/settle the payment.
Note: The bills of exchange or invoice discounted under TReDS will be “without recourse” to the MSME Sellers.
Who can register as a seller on the TReDS platform?
Only the sellers who qualify to be an MSME as defined u/s 7 of MSMED Act, 2006. Click here to understand the eligibility in detail
Should be engaged in business for at least 1 year.
Such sellers upon qualifying the above conditions can register themselves on the TReDS platform as MSME sellers.
Who will have to compulsory register on the TReDS platform?/Which Corporate have to compulsory register on the TReDS platform?
Prime Minister of India made an announcement that all the companies with an annual turnover of more than Rs. 500 crore, would have to compulsorily register on the Trade Receivables e-Discounting System (TReDS) platform. This will enable MSME sectors to get credit based on their receivables.
What is the cost for factoring/discounting under the TReDS platform?
Transaction charges will be levied by TReDS Platform for providing the services of factoring which needs to be paid by the MSME seller.
The interest cost will be levied by the Financier for providing the funds which will be payable by either an MSME seller or a Corporate buyer.
Note: TReDS platform cannot demand any security from either the buyer or seller for the purpose of factoring a trade receivable.
You may also like:
- Why according to RBI relaxation in PCA norms will lead to financial instability in the economy? Is Govt. of the same view?