The Reserve Bank of India (RBI) has allowed three players to launch Trade Receivables Discounting System (TReDS) — a digital platform where small businesses (MSMEs) can get access to capital by auctioning their trade receivables. Here is a detailed explanation of the concept of TReDs:
What is TReDS?
It is an electronic platform that allows auctioning of trade receivable. The process is also commonly known as ‘bills discounting’, a financier (typically a bank) buying a bill (trade receivable) from a seller of goods before it’s due or before the buyer credits the value of the bill. In other words, a seller gets credit against a bill which is due to him at a later date. The discount is the interest paid to the financier.
Who are the various stakeholders in the ecosystem?
Seller, say, for instance, a garment manufacturer or an automobile spare parts manufacturer; buyer, say, for instance, a big retailer like Pantaloons or D-Mart or a bike manufacturer like Honda or Bajaj; financier, mostly a bank or a factoring company which gives an advance to the seller against a bill due to him from the buyer; and discounting platform provider. As per RBI TReDS guidelines, only MSMEs can participate as sellers, while banks, non-banking financial companies and factoring companies are permitted as financiers.
How does the system work?
A seller has to upload the invoice on the platform. It then goes to the buyer for acceptance. Once the buyer accepts, the invoice becomes a factoring unit. The factoring unit then goes to auction. The financiers then enter their discounting (finance) rate. The seller or buyer, whoever is bearing the interest (financing) cost, gets to accept the final bid. TReDs then settle the trade by debiting the financier and paying the seller. The amount gets credited the next working day into the seller’s designated bank account through an electronic payment mode. The second leg of the settlement is when the financier makes the repayment and the amount is repaid to the financier.
What are the discounting rates?
The financiers can’t bid below marginal cost of funds-based lending rate (MCLR) rate set by the RBI. Typically, for buyers with good credit ratings, financiers bid near the MCLR rate. The spread widens depending upon the buyers' credit rating.
Who are the discounting platform providers in the country?
RBI has given license to three entities and they are governed by the Payment And Settlement Systems Act. These are Receivables Exchange of India (RXIL), which is a joint-venture between National Stock Exchange and SIDBI; A Treds, a joint-venture between Axis Bank and Mjunction Services; and Mynd Solution. RXIL was the first one to go live on January 9.
How are the volumes on these platforms?
The concept is still at a very nascent stage and all the three players are trying to empanel more corporates and financiers in order to succeed.
What are the teething issues faced by the platforms?
All the transactions undertaken on the TReDS have to be registered with the Central Registry of Securitization and Asset Reconstruction and Security Interest of India. The registration charge goes up to Rs 750, which discourages small-ticket sellers from using the platform. Also, TReDS providers want the KYC (know your customer) related regulations to be streamlined. Further, they want more players to be allowed as financiers. Currently, only banks and certain NBFCs are allowed to be financiers. Experts say even other participants like high networth individuals should be allowed to act as a financier to expand the market.