RBI proposes to expand scope of TReDS to improve cash flows for MSMEs
Feb 8, 2023
Synopsis
The Reserve Bank introduced TReDS in 2014 to facilitate financials of trade receivables of the MSMEs.
Delivering the Monetary Policy Committee report on Wednesday, the Reserve Bank of India (RBI) Governor Shaktikanta Das said the central bank would expand the scope of the Trade Receivables Discounting System (TReDS) to improve the cash flows for MSMEs.
"It is now proposed to expand the scope of TReDS by providing insurance facility for invoice financing, permitting all entities and institutions to undertaking factoring business to participate as financiers in TReDS and permitting rediscounting of invoices," Das said.
Because MSMEs don’t have deep pockets, they often face a cash crunch. A delay in payment for goods or services provided to a client — government or private — can sometimes land a heavy blow on small businesses. The fear of such a situation forces many to stay away from undertaking projects that are lucrative but may have a delayed payment cycle. MSMEs became even more hard-pressed for funds after the Covid pandemic began. Units that were not able to manage the acute resource crunch had to cease operations.
The insurance facility proposed by the RBI is likely to encourage discounting of payables of buyers irrespective of their credit ratings. Accordingly, insurance companies will be permitted to participate as a “fourth participant” on TReDS, apart from the MSME sellers, buyers and financiers, according to the MPC report.
It also said that the secondary market would allow financiers to offload their existing portfolio to other financiers within the same TReDS platform. All entities that can undertake factoring business under the Factoring Regulation Act would be allowed to participate as financiers in TReDS, said the statement.
These decisions are aimed to put more money in the hands of MSMEs involved in executing a project. These would help small businesses get cash more easily to keep its engines running while a client is yet to make payment for the goods or services.
After TReDS was introduced in 2014, three entities got permission to operate TReDS platforms, and two more have been granted in-principle authorisation. "These entities process about Rs 60,000 crore worth of transactions annually," added the MPC report.
The objective of the TReDS is to enable financing of invoices/bills of MSMEs, drawn on corporate and other buyers, including PSUs and the government departments, by way of discounting by financiers. The aim behind this was to cut down time taken for sellers to receive payments.
Sundeep Mohindru, MD and CEO, M1xchange, says the announcements aim to fulfill the requirement of a lot of SMEs doing business with medium-sized companies but don’t have a good credit rating. So they do not get finances easily and their invoices don’t get a discount. “Now, this insurance will act as a support to guarantee the low-risk profile buyer so that MSMEs can get the discounting done. If there is any payment default by the buyer, the bank can recover his juice through the insurance cover. So this is a big progressive step that will help thousands of MSME and get the invoices discounted," he says. The discounting plan will lead to more liquidity flow into the platform. “As a result, the MSMEs’ financing will increase," he adds.
[The Economic Times]
