Trade Receivables Discounting System (TReDS)

TReDS is an institutional setup for flow of finance to small ,micro and medium (MSME) enterprises at competitive rates through multiple financiers. TReDS are subjected to supervision by RBI and envisages its operation both in primary and secondary market segments. It majorly addresses the gaps in MSME ecosystem as the micro, small and medium enterprises faces challenges in getting their payments on time and thereby create working capital gaps. MSME also faces constraints on obtaining adequate finance in market place. This is an hindrance to drive MSMe sector to the next phase of economy. The existing few legal bindings have been not much effective to ensure timely payments and fairness in trade. Cash availability issues have been caused to the small sector units by big corporates, which depends to source a part of their products from MSME’s.To overcome this issue, RBI has proposed Trade Receivables Discounting System(TReDS) in March 2014 which is a digital platform wherein MSMEs can get access to cash. This plan was published taking into account the consultation of few stakeholders and interest of few entities.To set up electronic bill factoring exchanges, guidelines had been issued by RBI on December 3, 2014  related to Trade Receivable e-Discounting System (TReDS) regulated under the Payment and Settlement System (PSS) Act, 2007. WHAT IS TReDS?TReDS is basically an online process that allows the auctioning of trade receivables, also known as discounting bills. It fills the working capital demands. TReDS facilitate the financing of trade receivables through multiple financiers. This scheme discounts bills of exchanges as well as their invoices. Here, the seller gets credit which is due, and discount is the interest paid to the financier. They include buyers such as government bodies and public sector units who will be direct participants in TReDS. HOW DOES TREDS OPERATE ELECTRONICALLY?Micro,small and medium scale enterprises can upload the invoice on the electronic platform. It goes upto 750 INR for registration. It then goes digitally to buyers like big companies, or retailers like Honda, Mahindra, Tata etc for acceptance within a specified time. The financiers offer discounting rates to the buyers. The seller or the buyer bearing the interest rate gets to accept the final bid. TReDS does the final settlement and the amount gets credited the next working day into the seller’s account through corporates or banks. Later,the amount is repaid to the financer. The invoices cannot be bidden below the marginal cost of funds based lending rate(MCLR) set by the RBI. To ensure there is no window dressing TReDS may initiate random audits and check the authenticity and genuineness of the transactions.During the on boarding process entities are required to submit KYC related documents along with resolutions or specific documents to the authorised personnel of the buyer corporate. ID’s and passwords would be provided to the MSME seller. One time agreement would be drawn upon amongst the participants in TReDS. This is a master agreement where the where the buyer is obligated to pay on the due date once the factoring unit is accepted. To those disputes with respect to quality of goods  there would be no recourse provided and no set offs to be allowed.IMPORTANT PARTIES INVOLVEDAs of now, NSE Strategic Investment Corporation (NSICL) and Small Industries Development Bank (SIDBI)  , Axis bank  and Mynd solutions which runs no1 exchange has been licensed by the RBI. Receivables Exchange Of India Ltd (RXIL) has been furnished under the guidelines of RBI, it is a joint venture between SIDBI and NSE set up to operate a TReDS platform for factoring  of invoices of MSME’s. RXIL is the first one to get authorisation to launch the platform and also the first one to go live on January 9, 2017. These are expected to get MSME corporate buyers and banks together on the TReDS platform to facilitate a smoother flow of the processes.MAJOR BENEFITSTReDS benefits MSME sector by eliminating paperworks as they transact online. The other advantages include competitive discount rates, seamless data flow, standardised practices, important of all easy access to funds and  they work transparently..ISSUES FACED BY TReDSThe registration charges can discourage MSME  sectors by using the TReDS platform. All the transactions has to be approved and registered Central Registry Of Securitisation and Asset Reconstruction and Security Interest Of India. They also require KYC documents. Recommendations have been provided to involve wealthy individuals to expand markets as  TReDS require more entities as financiers. The concept is still incipient and the above three players are trying to pick out corporates and financiers to make this scheme a successful one. TReDS can take off successfully, if supported with a strong debt-recovery mechanism framework.  RBI has also sought  views on the concept paper of trade receivables discounting system in the country . Actionable feedback can be of some use.
Saurabh Jain
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Trade Receivables Discounting System (TReDS)

Saurabh Jain
Blog
13th Jun, 2017
Trade Receivables Discounting System (TReDS)

TReDS is an institutional setup for flow of finance to small ,micro and medium (MSME) enterprises at competitive rates through multiple financiers. TReDS are subjected to supervision by RBI and envisages its operation both in primary and secondary market segments. It majorly addresses the gaps in MSME ecosystem as the micro, small and medium enterprises faces challenges in getting their payments on time and thereby create working capital gaps. MSME also faces constraints on obtaining adequate finance in market place. This is an hindrance to drive MSMe sector to the next phase of economy. The existing few legal bindings have been not much effective to ensure timely payments and fairness in trade. Cash availability issues have been caused to the small sector units by big corporates, which depends to source a part of their products from MSME’s.

To overcome this issue, RBI has proposed Trade Receivables Discounting System(TReDS) in March 2014 which is a digital platform wherein MSMEs can get access to cash. This plan was published taking into account the consultation of few stakeholders and interest of few entities.

To set up electronic bill factoring exchanges, guidelines had been issued by RBI on December 3, 2014  related to Trade Receivable e-Discounting System (TReDS) regulated under the Payment and Settlement System (PSS) Act, 2007.

WHAT IS TReDS?

TReDS is basically an online process that allows the auctioning of trade receivables, also known as discounting bills. It fills the working capital demands. TReDS facilitate the financing of trade receivables through multiple financiers. This scheme discounts bills of exchanges as well as their invoices. Here, the seller gets credit which is due, and discount is the interest paid to the financier. They include buyers such as government bodies and public sector units who will be direct participants in TReDS.

HOW DOES TREDS OPERATE ELECTRONICALLY?

Micro,small and medium scale enterprises can upload the invoice on the electronic platform. It goes upto 750 INR for registration. It then goes digitally to buyers like big companies, or retailers like Honda, Mahindra, Tata etc for acceptance within a specified time. The financiers offer discounting rates to the buyers. The seller or the buyer bearing the interest rate gets to accept the final bid. TReDS does the final settlement and the amount gets credited the next working day into the seller’s account through corporates or banks. Later,the amount is repaid to the financer. The invoices cannot be bidden below the marginal cost of funds based lending rate(MCLR) set by the RBI.

To ensure there is no window dressing TReDS may initiate random audits and check the authenticity and genuineness of the transactions.During the on boarding process entities are required to submit KYC related documents along with resolutions or specific documents to the authorised personnel of the buyer corporate. ID’s and passwords would be provided to the MSME seller. One time agreement would be drawn upon amongst the participants in TReDS. This is a master agreement where the where the buyer is obligated to pay on the due date once the factoring unit is accepted. To those disputes with respect to quality of goods  there would be no recourse provided and no set offs to be allowed.

IMPORTANT PARTIES INVOLVED

As of now, NSE Strategic Investment Corporation (NSICL) and Small Industries Development Bank (SIDBI)  , Axis bank  and Mynd solutions which runs no1 exchange has been licensed by the RBI. Receivables Exchange Of India Ltd (RXIL) has been furnished under the guidelines of RBI, it is a joint venture between SIDBI and NSE set up to operate a TReDS platform for factoring  of invoices of MSME’s. RXIL is the first one to get authorisation to launch the platform and also the first one to go live on January 9, 2017. These are expected to get MSME corporate buyers and banks together on the TReDS platform to facilitate a smoother flow of the processes.

MAJOR BENEFITS

TReDS benefits MSME sector by eliminating paperworks as they transact online. The other advantages include competitive discount rates, seamless data flow, standardised practices, important of all easy access to funds and  they work transparently..

ISSUES FACED BY TReDS

The registration charges can discourage MSME  sectors by using the TReDS platform. All the transactions has to be approved and registered Central Registry Of Securitisation and Asset Reconstruction and Security Interest Of India. They also require KYC documents. Recommendations have been provided to involve wealthy individuals to expand markets as  TReDS require more entities as financiers. The concept is still incipient and the above three players are trying to pick out corporates and financiers to make this scheme a successful one. TReDS can take off successfully, if supported with a strong debt-recovery mechanism framework.  RBI has also sought  views on the concept paper of trade receivables discounting system in the country . Actionable feedback can be of some use.

Saurabh
Blog Author

 

One of the Co-founders, Saurabh serves as an active advisor to several SaveDesk’s portfolio companies and also works closely with them to improve business performance, select key management personnel, ensuring statutory and financial oversight and compliance supported by various agreements.Prior to SaveDesk, Saurabh spent seven years with Standard Chartered Bank commercial banking team as an associate director, where he was responsible for client management,financial analysis, portfolio management and large ticket deal’s execution in South India. Saurabh holds an MBA in Marketing from the Institute of Technology Management, and graduated with Honors degree in Electrical and Electronics Engineering from RGPV, Madhya Pradesh

 

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