TReDS-Trade Receivables Discounting System
Trade Receivables Discounting System(TReDS) is the first attempt in India to introduce automated system driven factoring service for the MSMEs. In Trade Receivables Discounting Systems, factoring service can be availed of by MSMEs without recourse.
What is Trade Receivables Discounting System (TReDS)?
Trade Receivables Discounting System(TReDS) is an automated system driven platform for MSMEs to avail of factoring services. The platform will bring together sellers, buyers and financiers for auction of trade receivables generated in the business activity of MSMEs. The transparent mechanism will ensure discounting of trade receivable at the best market rate.
The TReDS will bring in required transparency in the business eco-system which will enable MSMEs to achieve the twin purposes of timely encashment of receivables and elimination of credit risk.
What is role of MSMEs in the economic growth of a country?
MSME stands for micro, small and medium enterprises. They play a pivotal role in the economic and social development of any country by creating employment opportunities, ensuring distribution of wealth and inclusive growth. In India, Enterprises Development Act, 2006 (MSMED Act) defines the micro, small and medium enterprises and extends privileges to them. Click Micro, Small and Medium Enterprise: Classification and Original investment- MSMED Act, 2006 to know about the eligibility criteria for classification under MSME sector.
The growth potential of MSMEs is restricted by their inability to convert their trade receivables in a timely manner to cash. The initiatives of RBI to set up TReDS platform is against this background.
Who are the eligible participants in Trade Receivables Discounting System (TReDS)?
The eligible participants in TReDS platform are:
1. Buyers: Corporates and other buyers including Government Departments and Public Sector Undertakings and such other entities as may be permitted by RBI
2. Sellers: MSME entities as per the definition of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act)
3. Financiers: Banks, NBFC Factors, Financial Institutions and such other institutions as may be permitted by RBI from time to time
What is meant by Factoring and Reverse factoring in TReDS transactions?
Transactions relating to discounting trade receivables of MSMEs can be initiated in TReDs platform by seller or buyer. When the MSME seller initiates the transaction by uploading the invoices and bears the interest cost it is termed as “Factoring”. In this process single seller and multiple buyers are involved.
In the case of “Reverse Factoring” the buyer initiates the transaction and bears the interest cost. This is a single buyer multiple sellers transaction.
What benefits do TReDS offers to participants?
All three participants are benefitted from
• Automated transparent platform
• Hassle free paperless automated transactions and
• Cost reduction and easiness of the process
Benefits to Financiers
• Banks can classify the lending under Priority Sector Lending (PSL) benefits
• TReDS platform ensures KYC compliance of MSMEs
• Enables acquisition of new customers at lower cost
• Reduction of operational cost
Benefits to Sellers
• Competitive price discovery
• Without recourse to Seller transaction
• Freedom to choose best bid
• Payment received on T+1 on successful auction
• No follow-up with the buyers for payment
• Not dependent on single financier
• Enhanced productivity and efficient liquidity management
• Better and efficient finance options
Benefits to Buyers
• Compliant with MSMED Act, 2006
• Better negotiation with MSME Vendors
• Lower cost of inputs for Buyers
• Lower administrative cost
• Extended credit period
• Competitive Price Discovery
• Smooth cash-flow management
• Ensure that their vendors get sufficient cash / working capital
What are the process involved in Trade Receivables Discounting Systems (TReDS) transactions? .
• Seller uploads the invoice on the platform.
• Uploaded invoice goes to the buyer for acceptance.
• On acceptance by the buyer, the invoice becomes a factoring unit.
• The factoring unit goes to auction.
• Financiers enter their discounting (finance) rate.
• The seller or buyer, whoever is bearing the interest (financing) cost, accepts the final bid.
• settles the trade by debiting the financier and paying the seller.
• The amount gets credited to the seller’s bank account through an electronic payment mode on on T+1 basis.
• The second leg of the settlement happens when the buyer makes the repayment and the amount is repaid to the financier.
Which are the entities approved for setting up TReDS platforms?
Three entities have received permission from Reserve Bank of India (RBI) for setting up TReDS platforms. The entities will be governed by the Payment And Settlement Systems Act. They are:
1. Receivables Exchange of India (RXIL), which is a joint-venture between National Stock Exchange and SIDBI. RXIL was the first one to go live on January 9 2017.
2. A TReDS, a joint-venture between Axis Bank and Mjunction Services; and
3. Mynd Solution.
