Introduction to Trade Receivables Discounting System (TReDS) for SMEs
SMEs play a key role in driving India's economic growth. They account for one-third of the nation's GDP and employ millions. Still, they face multiple challenges on the commercial and operational aspects of their business, and are continuously looking for ways and means to enhance efficiency and profitability.
One of the key concerns for most SMEs in India is the lack of working capital. Inability to recover outstanding dues in time, has led to severe challenges even for the most profitable companies offering highly popular products and services. In this situation, adopting the Trade Receivables Discounting System (TReDs) for unlocking the potential of their receivables could open up multiple opportunities.
What is TReDS?
TReDs is an electronic platform for financing trade receivables. It facilitates the discounting of both invoices as well as bills of exchange. The three direct participants in the system are the SME (sellers), Corporate Entities (buyers) and the Financiers.
TReDS provides a level-playing field where all the participants work together for facilitating, accepting, discounting, and settling invoices. As per the guidelines of the Reserve Bank of India (RBI), only micro, small, and medium enterprises (MSMEs) can participate as sellers while NBFCs, banks and factoring companies are financiers.
How Does TReDs Work?
Let's understand the working mechanism of TReDs:
Step1. Seller uploads invoice (say Rs 1000)
Step2. Invoice goes to buyer for acceptance
Step3. Buyer accepts invoice
Step4. The invoice goes up for auction
Step5. Each financier enters the discounting rate, for e.g. Rs 800 or Rs 700 and so on
Step6. The party bearing the interest cost accepts the best bid
Step7. The financier’s account is debited and the seller’s account is credited
There are several rules and guidelines to safeguard the interests of all parties. For example, financiers cannot bid below the marginal cost of funds-based lending rate (MCLR) set by the RBI. Here, credit ratings play an important role. Generally, buyers enjoying good credit ratings get bids close to the MCLR rate.
Currently, there are two RBI-approved online marketplaces (TReDSs). These are:
- 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 mjunction service)
Benefits for SMEs
- Quick availability of finances at competitive rates
- Fast disbursal ensures liquidity
- Hassle-free and paperless documentation at the TReDs portal
- Adequate flow of cash and a healthy relationship with buyers
Currently, only a few NBFCs and banks are allowed as financiers. To expand the market, improve competitiveness, and offer more flexibility, experts recommend participation from high net-worth individuals. The Know Your Customer regulations also need to be streamlined.
Overall, TReDS can help SMEs unlock their working capital and ensure higher efficiency and capital management. Similarly, Reliance Commercial Finance has been helping Indian SMEs unleash their true potential through cost-effective SME loans and business finance. Talk to us know more.