What is TReDS?

The scheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs), through multiple financiers is known as Trade Receivables Discounting System (TReDS).

Following are the Salient Features of TReDS.

• Unified platform for Sellers, Buyers and Financiers
• Eliminates Paper
• Easy Access to Funds
• Transact Online
• Competitive Discount Rates
• Seamless Data Flow
• Standardised Practices

Background

MSMEs are the backbone of the Indian Economy and despite the important role played by them in the country’s overall economic growth, continue to face constraints in obtaining adequate finance, particularly in terms of their ability to convert their trade receivables into liquid funds. The Concept for setting up of electronic bill factoring Exchange was recommended by Financial Sector Reforms (FSR) Committee in 2008 in their report “Hundred Small Steps”. Based on the FSR Committee recommendations, SIDBI in collaboration with NSE had taken the initiative to set up an E-discounting platform to support the financing of MSME receivables. The platform was named NTREES (Trade Receivables Engine for E-discounting, Prefix ‘N’ stands for NSE and Suffix ‘S’ stands for SIDBI). The NTRESS platform was based on the reverse factoring model, where credit exposure was taken by large Purchaser / Corporates, who offered the invoices drawn by its MSME suppliers for discounting and SIDBI as the Financier discounted the same and credited the proceeds to MSME bank accounts through RTGS. The platform was based on the Mexican model (National Financiers – NAFIN) for bidding of MSME receivables.

TReDS Evolution

RBI on December 3, 2014 issued guidelines on Trade Receivable e-Discounting System (TReDS). Pursuant to the TReDS guidelines, RBI, on December 2, 2015 granted in-principle approval to SIDBI and NSICL for setting and operating TReDS as per the said guidelines issued under the Payment and Settlement System (PSS) Act, 2007. Adhering to the conditions given in the in-principle letter, a separate entity – Receivables Exchange of India Ltd (RXIL) was incorporated as a joint venture by SIDBI and NSE. We will discuss in our next post, how discounting is done in RXIL. On 24th Oct’17 Hon’ble Finance Minister, Government of India has mandated all major PSUs to get registered on the TReDS platform to shorten cash cycles of MSMEs.

Eligible Participants

• Sellers – Enterprises as defined under MSMED Act, 2006
• Buyers – Corporates, PSUs and Govt Departments
• Financiers – Banks and NBFS Factors

Who can initiate TReDS transactions?

Either the seller or the buyer can initiate a TReDS transaction for the financing of trade receivables of MSME sellers. When MSME seller uploads the invoices and bears the interest cost is termed as Factoring i.e. (Single Seller – Multiple Buyers). In the case of “Reverse Factoring” (Single Buyer – Multiple sellers), the buyer initiates the transaction and the interest cost also may be borne by the buyer.

Source: RXIL Website