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What Stopping Centre's TReDS Platform To Help Indian MSMEs

As India's micro, small and medium enterprises (MSMEs) still struggle with unpaid invoices from vendors in the post-Covid world, Trade Receivables Discounting System (TReDS) allows MSME suppliers to discount their bills and invoices

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With an aim to facilitate the financing and discounting of trade receivables of micro, small and medium enterprises (MSMEs) through multiple financiers, the Reserve Bank of India (RBI) introduced Trade Receivables Discounting System (TReDS) in 2014.

Since then, the volume of invoice discounting facilitated by TReDS has sparked discussions among industry insiders as many believe that this platform has failed to create meaningful volumes of invoice discounting. 

While describing the drawbacks of TReDS, experts said that MSME suppliers' identity is a major concern for big companies as they believe that their competitors will be able to find out from where they source their materials. Apart from that large corporations prioritise providing lengthier credit terms to their suppliers and will not recover receivables within 45 days.

"The TReDS mechanism has been partially successful in achieving its goal of providing an alternative to the conventional bank financing of working capital. Very few MSME vendors have been able to avail of the facility of TReDS due to the reluctance of their buyers to onboard the TReDS platforms. While it is true that TReDS’ bill discounting platforms are yet to see meaningful growth, the system is not restricting the growth of the MSME sector. The system is sound in theory but it has failed to take off and create noticeable success," said Saket Dalmia, President, PHD Chamber of Commerce and Industry. 

Last year, the centre's public policy think-tank Niti Ayog in its report stated that while TReDS was “sound in theory as observed by the U K Sinha Committee, it failed to take off and establish a meaningful volume of invoice discounting.”

It stated that the shallow pools of financing capital and lack of corporate buyer incentives as the major reason behind the slow growth. 

"We definitely need to acknowledge the concerns raised by NITI Aayog in their report regarding the growth of TReDS bill discounting platforms, it is important to consider the broader perspective and the evolving nature of such initiatives. It is aimed to address the financing challenges faced by these enterprises and promote their growth. However, like any new system, it takes time for meaningful growth to materialise," said Praveen Gaur, CFO, TradeIndia. 

Gaur believes that the TReDS platform has the potential to be a valuable tool for Indian MSMEs in the long run, enabling them to access timely financing and manage their working capital requirements more efficiently.

"The adoption has been low mainly due to reluctance of buyers to upload/ accept invoices and commit payment on the due date, lack of credit guarantee/ insurance mechanism to facilitate factoring of unaccepted invoices and low negotiating capability of MSMEs with their buyers to insist on the use of factoring platforms," said Ramesh Dharmaji, Consultant - Global Alliance for Mass Entrepreneurship (Game).

Low traction on the platform: 

Modi government has mandated that all companies with a turnover of Rs 500 crore and above should register on the TReDS platform, but there are various reasons for corporates not being interested in utilising the TReDS facility.

There is a lack of any incentive for the corporate buyers for joining TReDS and secondly, many corporate buyers already have their own corporate treasury departments that operate their own reverse factoring programs for their supplier ecosystem. 

In addition, only entities regulated by the Reserve Bank of India (RBI) can finance on these platforms and not the other fintech companies which restrict participation.

According to the government data, only 35.2 per cent of the 4,714 large companies with Rs 500 crore turnover each (as identified by the Ministry of Corporate Affairs in April 2021) were registered on TReDS as of April 2022. 

"Even such registration was done by corporates to fulfil the compliance norms since most companies had not actually started transactions. Further, many corporate buyers do not encourage their MSME sellers in putting their invoices on TReDS and therefore, its traction is quite low," said Dalmia. 

However, in a written reply in the Lok Sabha, Bhagwat Karad, minister of state in the finance ministry in March stated that TReDS has financed about 54.56 lakh invoices till February 2023 and the amount involved in invoices discounted was at Rs 1.42 lakh crore. 

"It signifies a substantial achievement in terms of converting invoices into immediate liquidity for MSMEs. However, it is also important to put these numbers into perspective, considering the vast scale and potential of the MSME sector in India. With millions of MSMEs operating across diverse industries, the current traction of 54.56 lakh invoices, though significant, may be considered relatively low when compared to the total number of invoices generated within the ecosystem," Gaur added. 

Way forward: 

Experts noted that all stakeholders should acknowledge its positive intent, assess its impact holistically, and consider the evolving market dynamics. There is also a need to put forward concerted steps to foster wider participation and maximise the utilisation of TReDS, unlocking its full potential to empower and uplift the MSME landscape.

"The next step could be smooth integration and flow of invoices from GST and other e-procurement platforms. Also, encourage more lenders with appropriate credit enhancement measures. Overall a mindset shift is needed to address this vexing delayed payment problem, holistically," added Dharmaji. 

Dalmia added that to make the TReDS system successful, there is a need for onboarding more corporate buyers, MSME sellers, public sector enterprises and state governments on the TReDS platform.

Meanwhile, as several firms have not joined the TReDS platforms due to their inability to provide sufficient comfort to the Bankers for discounting their vendors' bills, authorities should make more attractive and certain concessions to PSUs/large companies.