TReDS is essentially an online auction process for trade receivables, also known as discounting bills. In other words, it satisfies necessary short-term financing. TReDS allow trade receivables to be financed by a number of different lenders. Invoices and bills of exchange are both discounted under this plan. Credit is extended to the vendor, and the discount represents interest paid to the financier. There will be direct participants in TReDS from a variety of sectors, including buyers like government agencies and public sector organisations.
The Reserve Bank of India (RBI) has implemented the Trade Receivables Discounting System (TReDS) to make it easier for Micro, Small, and Medium-Sized Businesses (MSMEs) to obtain financing or discounts on their trade receivables from a variety of lenders. Companies, as well as government agencies and Public Sector Undertakings (PSUs), may be the source of such receivables.
For the many issues that arise from late payments, especially for MSMEs, this is a simple solution.
- Lack of available funds prevents the company from growing and taking on new projects.
- Expenses for maintaining normal operations can’t be met because cash flow is inadequate.
- Negative effects on relationships and brand reputation due to late payments to vendors.
- Due to not being able to pay off debts, your credit score will suffer, making it difficult to obtain credit in the future.
Over INR 500 crores in annual revenue necessitates use of the TReDS platform, as of 2 November 2018 per the Department of Micro, Small, and Medium Enterprises. Companies with a turnover of more than INR 500 crores and all Central Public Sector Enterprises are mandated to adopt a TReDS platform, according to the notice. As a result, these businesses are now required to become TReDS members.
For the purpose of ensuring that this notification is followed, the Registrar of Companies (RoC) in each state has been designated as the competent authority.
As a result of TReDS
- MSMEs now have greater access to financing at competitive rates without having to provide additional collateral. Additionally, the financing is nonrecourse to the MSMEs.
- Through better vendor financing negotiation, corporations can reduce procurement expenditures.
- Multiple financiers have the opportunity to build Priority Sector Lending (PSL) asset portfolios on Trade Receivable Exchange platforms which aim to provide MSMEs with supply chain-related cash flow financing at competitive interest rates.
What is the Electronic Functioning of TReDS?
The invoice can be uploaded to the electronic platform by micro, small, and medium sized businesses. In India, the fee increases to 750 INR. After that, it is sent digitally to companies or retailers like Honda, Mahindra, Tata, etc., who are potential buyers, with the expectation of acceptance within a given time frame. The lenders provide discounts to the buyers and the winning bidder is the one who pays the interest rate, whether that’s the seller or the buyer. The seller’s account is credited by corporates or banks the following business day after the final settlement is processed by TReDS. The money is paid back to the financier at a later date. Invoices can’t go for less than the RBI-mandated MCLR (marginal cost of funds based lending rate).
During the on-boarding process, entities are required to submit KYC related documents along with resolutions or specific documents to the authorised personnel in order to ensure there is no window dressing. The MSME vendor would be given access credentials like usernames and passwords. Participants in TReDS would reach a one-time agreement among themselves. When a factoring unit is accepted, the buyer is bound by the terms of this master agreement, which includes the obligation to pay on the due date. There would be no recourse provided and no set offs would be allowed for disputes involving the quality of the goods.
In other words, TReDS facilitates the uploading, accepting, discounting, trading, and settles the invoices/bills of exchange of MSME Supplier by bringing together MSME Suppliers, Buyers (i.e. Corporates, Government Departments, and Public Sector Undertakings), and Financiers (i.e. Banks, NBFCs, and Financial Institutions). A valid invoice is uploaded by the MSME Supplier to the TReDs Platform, where it is checked for accuracy and given final approval by the Buyer. Approval triggers a bidding process in which multiple Financiers offer reduced rates on the approved invoice. If the MSME Supplier decides to accept the bid, it can do so at its own discretion; once the bid is accepted, the payment is processed, and the MSME Supplier’s account is credited with the discounted amount.
Benefits of TReDS for MSMEs
- Quicker payments – MSME sellers typically receive funds within 48 hours of receiving approved invoices.
- Multiple financiers – The TReDS provides MSMEs with a broader range of financial options. They can select the lowest bidder from among several financiers.
- Borrowing without recourse means that MSMEs are not obligated to repay the financier if the buyer fails to repay.
- Lower funding costs – TReDs use a transparent bidding process that enables MSMEs to find the best quote. Due to the buyer’s credit rating, the seller can obtain financing at competitive terms.
- Off-balance-sheet financing – The TReDs provides a collateral-free bill discounting service that does not affect the balance sheet of the business’s other expenses because it involves the sale of receivables.
- Working capital without collateral – Sellers can meet working capital requirements by bill discounting unpaid invoices.
- Business expansion is made easier with timely payments and a consistent record of meeting working capital requirements.
TReDS is a digital portal. It enables MSMEs to obtain funds in advance against trade receivables. They can now more easily meet liquidity needs and better manage their business thanks to the increased speed with which they can access funds.