CRISIL SME tracker: TReDS will materially change MSME credit access

To address the funding crunch faced by micro, small and medium enterprises (MSMEs), the government on November 2, 2018, announced initiatives to improve credit access, as part of its support and outreach programme for the sector. This includes asking companies with a turnover of more than Rs 5 billion to mandatorily embrace the Trade Receivables e-Discounting System (TReDS). 

Bank credit to micro and small enterprises (MSEs), especially in manufacturing, has shown no signs of growth in the past two fiscal years, and actually declined for medium enterprises (source: RBI). 

For a long time now, there has been a structural need to address the funding and liquidity woes of the entire MSME landscape, particularly working capital.

TReDS has the potential to take care of a significant portion of the requirement.

CRISIL’s analysis of nearly 10,000 MSMEs shows their average trade receivables is about 75 days — a significant stretch that forces them to resort to high-cost debt to keep business running.

As for credit flow from banks and non-banks, a marked improvement will take time because of enduring challenges they face.

In this milieu, the government's move to launch a portal to assess and sanction loans of up to Rs 10 million in a matter of minutes will help micro enterprises significantly, while TReDS can change the game for small and medium enterprises by engendering their credit history by enabling tracking of their receivables' realisation — or, when and how dues from corporates were received.