The term TReDS stands for the Trade Receivables Discounting System. It was released by the Reserve Bank of India in 2018. This platform aims at resolving cash flow issues for small businesses. In this write-up, we shall look at the various facets of this very portal that all MSMEs should be aware of.
An Overview of the TReDS portal
MSMEs have long been confronting the challenge of maintaining an optimal cash flow. Payment default and deferred invoices from the vendor have become a commonality in this sector. To extinguish such nuisances, the Government launched the TReDS portal that enables MSME suppliers to discount their invoices and bills.
The Reserve Bank introduced this web portal to ensure prompt and secure transactions between MSMEs and vendors. The portal has already slashed down the annual interest payout for small and medium enterprises. The TReDS’ primary objective is to permit MSME sellers to discount invoices raised against prominent companies, which enables them to administer their working capital demands.
TReDS was first launched in 2014 by the central bank. Three platforms were accorded licenses to leverage the TReDS mechanism in 2017, including Invoicemart (a joint venture between mjunction services and Axis Bank ), Mynd Solutions, and RXIL (a joint venture between NSE and SIDBI).
Understanding the concept of Invoice Discounting
Small enterprises can utilize invoice discounting to get prompt access to funds held in outstanding invoices and tap into the valuation of their sales ledger. It’s simple- when businesses invoice a client or customer, the lender facilitates such businesses a share of the amount, increasing their cash flow.
Invoice discounting is seldom considered as a short-term loan backed by invoices. Lenders are very well aware of the shabby finances of small companies and lend them credit against their unpaid invoices to maintain healthy cash flow.
Salient features of TReDS portal
- TReDS serves as a common platform for MSME sellers, financial institutions, and corporate buyers.
- All transactions are executed electronically.
- Negligible documentation
- Prompt and seamless access to funds
- A standardized procedure for uninterrupted data flow
- Competitive Discount rates
- Ensure prompt access to working capital.
- Working Capital with No Collateral
- In 24-72 hours, an applicant can have access to working capital via bill discounting of unpaid invoices.
- Get seamless and prompt access to working capital and shorten the financial cycles of the business.
- M1xchange facilitates non-collateral based bill discounting services that have no adverse impact on your financial statements.
- Help businesses maintain healthy cash flow.
TReDS Advantages For Buyers
- Seamless and easy tracking of cash flow
- Simplified and error-free payment cycles
- Seeks minimal documentation and money
- Highly transparent
TReDS Advantages For Sellers
- Allow vendors to acquire a receipt of funds in a prompt timeframe
- Seeks minimal documentation and money
TReDS Advantages for Financers
- Availability of a broader market
- Ensures instrument qualification
- Minimal operational expenditure
Pitfall of TReDS portal
The identity of MSME suppliers has become a serious subject matter for large companies lately. Prominent organizations are reluctant to upload invoices for fear of exposing their MSME supplier’s list to their competitors. The Government is required to patch this loophole as soon as possible.
There is also a concern among the MSME suppliers relating to the payment settlement time. They want this portal to align with the Government’s decision that seeks businesses to settle MSME payments in 45 days.
Which platform in India served as the first-ever TReDS-based platform?
The name of the first-ever TReDS-based platform was the RXIL. It came to effect in January 2017. It was developed in association with NSE and three banks. TReDS is a web-based platform that enables MSMEs to borrow money from different lenders to fund their trade receivables.
The TReDS platform provides MSME sellers with an auction mechanism to discount unpaid bills and invoices against prominent companies, such as government agencies and public sector companies, ensuring the swift realization of trade receivables at market rates.
What are the two major concerns of the TReDS portal?
According to many bankers, two concerns are limiting the full-fledge take-off of the TReDS. For one thing, many entities believe their rivals shall be able to identify their source of material procurement. Two, entities often prefer to facilitate lengthier credit terms to vendors and shall not recover trade receivable within 45 days.
Criteria for Setting up and Operating the TReDS portal
Entities seeking to set up and operate the TReDS portal should comply with the gien norms:
1. Budgetary requirements
- The minimum paid-up equity of the TReDS shall be Rs 25 crore. TReDS’ Foreign ownership shall be regulated by the prevailing foreign investment policy.
- Companies other than the promoters shall be banned from owning more than 10 per cent of the TReDS’ equity capital.
2. Due diligence on the promoters’ part
Corporations and their promoters should be fit and suitable to act as TReDS, as specified by the SEBI Regulations, 2009.
The RBI shall determine the fit and appropriate’ status of the applicant based on their track record of financial soundness.
Apart from that, Reserve Bank shall also look into its business performance for the last five years.
Other regulators and vetting agencies, such as the Enforcement Directorate, Income Tax Department, the CBI, and SEBI, may, if needed, request feedback on the candidates.
3. Capabilities in terms of technology
The TReDS must have a resilient technological base to bolster its operations. Consequently, the TReDS should fulfil the given technological requisites.
TReDS must be able to facilitate a web-based platform for all participants
The TReDS must have a viable BCP, i.e. Business Continuity Plan, which includes a disaster recovery site and a web-based monitoring capability that tracks positions, volumes, and prices in real-time to avert system manipulation.
Application Procedure for Authorization
This pdf paperwork by the Reserve bank facilitates both the essential directions and the application format for any non-bank entity prompting authorization to operate a payment as per the PSS Act. Entities seeking to set up the TReDS portal can file a prescribed application form with the RBI. The full filed application should be furnished to the RBI’s registered address.
Common queries around the TReDS portal
How does the TReDS web-portal help MSMEs manage their working capital?
TReDS is a state of the art software platform. The platform empowers MSMEs to receive funds in advance, permitting them to administer any working capital problems and effectively manage their businesses. Since it is an off-balance sheet transaction, discounting receivables can serve as an ideal funding source for financially-aggrieved MSMEs, as per the centre.
TReDS platform allows small businesses to procure working capital by auctioning their unpaid invoices.
Enlist one concrete benefit of the TReDS Platform?
It helps registered MSMEs boost their liquidity collectively.
How does the TReDS platform work in general?
Banks and other financial avenues shall compete to occupy the supplier’s receivables. Rather than manifesting the MSME’s creditworthiness, the interest rate shall imply the creditworthiness of the bigger company on whom the invoice is raised.
On the pre-determined time slot, the settlement file shows how much a financier has to pay an MSME and how much a buyer owes to such a financier, ensuring credit discipline.
Why should small firms register?
Factoring is yet to gain traction in India because prominent companies continue to abuse their stranglehold over small companies, delaying payment for months. Consequently, registration with TReDS ensures that payment transaction happens on time and that larger companies are not bullied.