Credit and Finance for MSMEs: Hit really hard by Covid, MSMEs are turning to the Reserve Bank of India-regulated on the internet bill discounting platform Trade Receivables Discounting System (TReDS) to handle their working capital woes.
RBI had introduced the idea in a paper in 2014 and the initial TReDS platform Receivables Exchange of India (RXIL) was set up in January 2017. Since then two more platforms: Mynd Solution’s M1xchange and Invoicemart (a joint venture amongst Axis Bank and mjunction services) have been offered the license to operate.
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But, it was only for the duration of the Covid pandemic that TReDS saw an elevated uptake from corporates and MSMEs. Of the total invoice discounting that has occurred on TReDS, 43 per cent was transacted for the duration of the last fiscal, at Rs 17,153 crore, Ketan Gaikwad, MD & CEO at Receivables Exchange of India (RXIL) told TheSpuzz Online. These 3 platforms with each other have carried out bill discounting worth Rs 39,000 crores by 31st May 2021.
The Covid pandemic brought the realisation in organisations that they are as robust as the weakest hyperlink in their provide chain. “In the initial phase of Covid, corporates announced that they will not make payments to their suppliers till the situation improves. But that led to major supply chain disruptions around the country and they realised they have to take care of the smallest component in their supply chain ecosystem,” stated Gaikwad.
Today, it is not just medium-sized enterprises that are on TReDS. Of the 24,000 MSMEs registered on the bill discounting platform, 43 per cent are micro and 47 per cent are smaller enterprises from 560 cities across the nation.
“While Rs 17,000 crore in one year is a fraction of the factoring when compared to the overall credit flow in the economy, it shows that TReDS is beyond the proof of concept stage and that its stakeholders are finding value in the platform,” stated Sangram Singh, Executive Vice President and Head – Commercial Banking Coverage Group, Axis Bank.
The benefits are clear: a transparent bidding mechanism via several financiers, the non-recourse financing for MSMEs, payment to MSMEs inside 48 hours of bids getting accepted by corporates/PSUs amongst other folks.
Despite the tremendous added benefits, numerous misconceptions about TReDS stay. Some typical ones are the sort of charges that will be deducted. Also, whilst it is a non-recourse facility, there is an apprehension amongst the MSMEs that their credit ratings will get impacted if the purchaser defaults. “Most of the MSMEs work in the unorganized sector and more than 50% even today don’t even understand how this works,” stated Kamlesh Joshi, Partner at mid-sized technologies services provider Code Tech Solutions. He adds that he has located resistance amongst unlisted firms and mid-sized corporations to transact on the platform mainly because even a single-day delay in paying dues on TReDS is deemed a default.
To enhance its adoption, there is a will need to spread awareness about the worth proposition of the TReDS platforms amongst MSMEs and corporates so there is a clear differentiation that it is not one more loan or credit card programme.
To know more about TReDS, do watch TheSpuzz Online’s webinar on TReDS right here.