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Trade Receivables Discounting System (TReDS)

Trade Receivables Discounting System (TReDS)

Trade Receivables Discounting System (TReDS)

TReDS is a digital platform initiated by the Reserve Bank of India (RBI) for facilitating MSMEs by financing their trade receivables. It enables market making and discovery of competitive rates for invoice/exchange bills of MSME sellers made to large corporates, Government departments and public sector undertakings, through an auction mechanism to ensure the prompt realisation of trade receivables at competitive market rates. In India, TReDS is introduced for factoring without recourse to the seller and will help MSME sellers in the quick realisation of receivables and also efficient price discovery. In this article, we look at the Trade Receivables Discounting System in detail.

Objective

The main objective of the Trade Receivables Discounting System is to facilitate financing of invoices/bills of MSMEs drawn on corporate and other buyers, including the Government Departments and PSUs, by way of discounting by financiers. The participants in TReDS work together for facilitating, accepting, discounting, and settling invoices.

Eligible Entities

The TReDS platform allows different participants for facilitating, uploading, accepting, discounting, trading and settlement of the invoices/ bills of MSMEs as observing the below following.

MSME SuppliersBuyersFinanciers
Supplying goods or services to Buyers
  • Corporates
  • Government Departments
  • PSU and Others
  • Banks
  • NBFC Factors

As per the provisions of the Reserve Bank of India (RBI), only MSMEs (micro, small, and medium enterprises) can compete as sellers while NBFCs, banks and factoring companies are financiers. TReDS transactions can be initiated by both the seller and the buyer for the financing of trade receivables of MSME sellers. When the invoices are uploaded by the MSME seller and bear the interest cost, it is defined as “Factoring,” i.e. (Single Seller to Multiple Buyers). In the case of “Reverse Factoring” single buyer initiates the transaction, and the buyer also bears the interest cost.

Key Benefits of TReDS

The below following are some of the key benefits of Trade Receivables Discounting System (TReDS).

All Participants

  • Automated transparent platform
  • Paperless and hassle-free process
  • Cost Reduction
  • Low administrative and operational cost
  • Faster transaction and low turnaround time for financing

Benefits to Buyers

  • Compliance with MSMED Act, 2006
  • Competitive price discovery through auction
  • Lower supply chain cost for buyers
  • Help efficient cash-flow management

Benefits to Sellers

  • Competitive price discovery
  • Without recourse to the seller
  • MSMEs have the right to determine the best bid
  • Payment received on T+1 on the successful auction
  • No follow-up with the buyers

Benefits to Financiers

  • Priority sector lending benefits
  • Lower cost for new customer acquisition
  • Cross-selling products.

 Benefits to MSME vendors

  • Competitive price discovery through auction.
  • Lower cost of financing as financing based on buyer’s credit profile.
  • Immediate payment against trade receivables.
  • Without recourse to MSME vendors.
  • No follow-ups for payment
  • Efficient working capital management due to improved liquidity.
  • Widening financing options for MSME vendors.

Discount Rates

There are various rules and guidelines to safeguard the interests of all individuals. The below following are the two RBI-approved online marketplaces (TReDSs).

  • RXIL (India’s first TReDS platform established by SIDBI in partnership with NSE and three banks (SBI, ICICI Bank and YES Bank) and
  • A TREDS (a joint venture of Axis Bank and junction service)

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Post by Sinduja Shankar

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