TReDS, a digital platform, was set up to be a catalyst for the growth of MSMEs by bringing in transparency and facilitating access to finance by auctioning their bills and invoices raised against large corporates, including government departments and public sector undertakings.
By Alok Mittal
The genesis of Trade Receivables Discounting System (TReDS) can be traced back to the recommendation of the Financial Sector Reforms (FSR) Committee in 2008, in the report titled “Hundred Small Steps”; the report conceptualised an electronic bill factoring exchange. After a few recommendations and guidelines, TReDS was launched by the Reserve Bank of India (RBI) in 2018 with the sole objective of tackling the needs of MSMEs, which are two-fold: promptly en-cashing receivables and eliminating credit risk.
TReDS, a digital platform, was set up to be a catalyst for the growth of MSMEs by bringing in transparency and facilitating access to finance by auctioning their bills and invoices raised against large corporates, including government departments and public sector undertakings. This enables them to receive payments faster and convert their trade receivables into liquid funds, and aids efficient price discovery. TReDS is said to be the first attempt in India to introduce factoring without recourse to the seller. While it was set up to straighten out many kinks, the uptake has been low since its inception, and RBI has tweaked and eased the provisions to tackle this.
As part of these efforts, RBI Governor Shaktikanta Das, on February 10, proposed to hike the NACH mandate limit from Rs 1 crore to Rs 3 crore for TReDS-related settlements. This is meaningful for larger transactions to happen on TReDS. It opens up many possibilities for larger transactions—the upshot is it is beneficial to medium and small enterprises looking to scale up. However, it does not help micro-enterprises, because of the latter’s size and their exclusion by larger lenders. Micro-enterprises are often thin-file borrowers and also supply to smaller buyers—the current depth of TReDS exchanges does not support such small buyers and sellers.
In India, there were 6.3 crore MSMEs registered in 2021; micro-enterprises constituted 94.5% of them, followed by small enterprises at 5% and medium enterprises at 0.5%. In other words, while the mandate was a measure to improve liquidity, 94% of the sector remains on the back-burner. Digital finance and NBFCs are playing an increasingly large role in addressing the financial needs of micro-enterprises. In traditional lending systems, borrowers are required to present documentation, collateral, business vintage, which many micro-enterprises may not have, automatically disqualifying them. Through data-driven credit models, digital lenders and NBFCs are playing an increasingly important role in democratising access to credit. In 2018, the MSME ministry mandated that all registered companies with a turnover of more than `500 crore and all Central Public Sector Enterprises get themselves on-boarded to the TReDS platform, and the government has taken multiple steps towards ensuring the same.
During the first wave of the pandemic in 2020, the MSME sector faced a big blow and was faltering because of the economic fallout. The financial stability report released by RBI cautioned banks of the possibility of increasing default by the MSME sectors. A long-term side effect of the lockdown was delayed payments, which not only disrupted the business cycle of individual MSMEs but also impacted the sector as a whole. There was a surge in TReDS usage to fund the MSME units and meet their priority sector lending obligations. Subsequently, the government adjusted to this increased demand and widened the scope of the Factoring Act of 2011 to allow NBFCs to be a part of TReDS. MSMEs avail discounting facilities from factoring companies, and they can exchange their receivables online and get quick instalments from these factoring organisations at a discount. While this was a step in the right direction, it was inadequate because this only allowed seven NBFCs to be a part of the platform.
In January 2022, RBI published new guidelines, per which regular NBFCs can be enrolled into TReDS if they have an asset size of over Rs 1,000 crore. This increased the number of NBFCs from seven to over 150. But that is not enough; it still largely excludes younger fintech companies when it comes to participating on the platform unless they are predominantly into factoring. Such a restriction will limit the TReDS platforms from gaining depth, and hence, their ability to serve micro businesses.
There is no denying that MSMEs are an important thread in the economic fabric of our country, and their significance is only increasing. Digital lenders look at credit from a different angle, and therefore, the approach they take is innovative, like the ecosystem-based approach where creditworthiness is mapped against economic behaviour, payment history, etc. To truly enhance the economic and financial sustainability of MSMEs, the regulators should revisit the thresholds to allow more data and technology-driven fintech NBFCs to participate. Allowing more of these players under the umbrella will increase the platform’s reach and impact, and only then will this type of credit be genuinely inclusive.
The writer is CEO & co-founder of Indifi Technologies.
