TReDS can be a lifeline for small businesses

The government and its enterprises are the single largest agencies that procure goods from MSMEs. They need to use the Trade Receivables Discounting System to make timely payments to such businesses

Micro, small and medium enterprises (MSMEs) are vital towards building a $5 trillion economy. The pandemic saw many MSMEs face a massive liquidity crunch, and this makes TReDS (Trade Receivables Discounting System) a key platform to revive the economy by providing financing to small businesses.

 

Central public sector enterprises (CPSEs) are mandated by the government to procure at least 25 per cent of their purchases from MSMEs and to register on TReDS. Since the government and its CPSEs are the single largest institutions that procure from MSMEs, their potential to promote its use and grow the transaction volumes on TReDS is immense. In the current economic climate, CPSEs can act as saviours that have the potential to provide liquidity to MSMEs by ensuring payment of their dues on time.

 

According to a gazette notification of November 2, 2018, all CPSEs and private companies with a turnover of over Rs 500 crore are to be registered on any of the TReDS platforms. The issue lies in whether they are using TReDS to settle the payments of their MSME suppliers or not. Since 2017, TReDS has enabled over 20,000 MSMEs to receive over Rs 30,000 crore in payments on time. However, this represents only a fraction of the overall amount public enterprises spent on procurement from MSMEs.

 

TReDS is being perceived as a simple compliance requirement rather than being effectively utilised for its ability to provide quick, easy, and low-cost finance to MSMEs. When it comes to active use of the platform, of the 156 CPSEs that have registered, only 32 have undertaken any transactions. And of this number, only eight have disbursed more than Rs 10 crore worth of payments, as of September 30, 2020.

 

Information technology infrastructure and processes are fundamental to the TReDS system, and while CPSEs have been at the forefront of adopting efforts at digitisation, sometimes the sheer size of the enterprises creates challenges when it comes to implementing changes. When it comes to procurement, CPSEs rely on existing channels with legacy solutions. TReDS enforces payment discipline, and puts an end to the free credit enjoyed by CPSEs and corporates at the expense of MSMEs. Numerous MSMEs have reached out to us complaining about the highhandedness and use of old ways to settle their dues.

 

For MSMEs, the priority right now is access to liquid cash, and TReDS can be the enabler. A report on the amendments to the Factoring Act, by the Parliamentary Standing Committee on Finance led by Jayant Sinha, has recommended taking the legislative route to make it compulsory for the receivables coming from central and state governments to be brought under the ambit of TReDS, in order to ensure timely payments.

 

Another important suggestion made in the same report makes a case for the integration of TReDS with the GSTN e-invoicing portal, leading to automatic uploading of all GST invoices. A compulsory listing of all GSTN invoices on TReDS, and the consequent tracking of when these payments are made, provides excellent economic data on the state of the economy. It will also provide valuable credit information to enable the credit scoring of various companies and government entities. Another much-awaited and effective reform in-the-waiting has been to allow non-banking financial companies (NBFCs) — other than NBFC Factors — to discount MSME invoices on TReDS. As a nation, we need to move towards respecting the wealth generators of our country and the credit discipline which gets sacrificed at the altar of populist measures.  

 

The writer is the Managing Director and Chief Executive Officer of the Receivables Exchange of India. This column has been edited for space