RBI Expands Scope of TReDS: What are its Implications?

In 2018, the Reserve Bank of India (RBI) introduced the Trade Receivables Discounting System (TReDS) with the aim of helping Micro, Small and Medium Enterprises (MSMEs). TReDS is an electronic platform that helps facilitate the financing/discounting of bills and invoices of MSMEs though numerous financiers. These bills or invoices may be due from vendors, corporates and other buyers, which also includes the various government departments and Public Sector Undertakings (PSUs).

The platform not only allows MSMEs to quickly receive their payments but offers a significantly smaller annual interest payout to SMEs as well.

Aim of the Platform

The main goal of TReDS is to assist with the financing of invoices of MSME vendors that have been drawn on by big companies and other buyers, including PSUs and different departments of the government, by providing discounts from different financiers on the platform. It is a cohesive system, where all participants work towards the same goal, i.e., to facilitate, accept, discount, and settle invoices.

It basically allows MSMEs to approach financiers to raise some financial capital against the bills or invoices they are due to receive after a certain period from some vendor or a department of the government. They may choose to do so if they urgently need some working capital but must wait for some time before obtaining the due receivables.

Key Benefits of TReDS

Here are some key benefits of TReDS for different entities involved in the process:

Buyers	Sellers	Financer
Buyers enrolled on the platform can accurately track their cash flow.	Vendors are able to obtain a receipt of funds after a reasonable period.	Gains access to a broader market.
Enables error-free and seamless payment cycles.	Only a small amount of paperwork and money is required.	Operational costs are reduced.
Requires only a small amount of paperwork and money. Transparency is of utmost importance on the platform.		Guarantees instrument qualification.

Who are the Participants of the TReDS Scheme?

• MSMEs, corporates, other customers (PSUs and government departments), and financiers directly participate and contribute in the TReDS.
• Several parties can use TReDS as a hub to connect on. It helps simplify the process to upload, accept, discount, trade and pay the bills and invoices of MSMEs.
• Bankers of the vendors and buyers are granted access to the system if is necessary to acquire details related to their customers’ discounted bills and/or invoices.
• TReDS may develop agreements with entities like technology providers system integrators and organizations that offer dematerialization services to provide their services.

Latest Amendments

RBI informed TReDS’ operators and participants about the expansion of the scope of the platform through a circular dated 7 June 2023. The RBI introduced certain ‘Guidelines for the Trade Receivables Discounting System’ to relieve the constraints encountered by MSMEs when raising liquid funds against trade receivables. These guidelines facilitate financing/discounting the due bills and invoices of MSMEs on a ‘without recourse’ basis through approved financiers.

What are the Key Takeaways of the Notification?

• Insurance facility for Factoring Transactions

On the platform, financiers only place bids on the vendors with high credit ratings and refrain from bidding on any low-rated buyers. To tackle this pattern, an insurance facility was introduced for TReDS transactions that would help financiers hedge default risks.

• Settlement of Undiscounted FUs

The RBI noticed that certain FUs on the TReDS platforms had not been discounted, which would result in such Factoring Units (FU) being forced to make settlements outside the TReDS. To resolve this issue, operators of TReDS shall be allowed to undertake settlement of all FUs, be it financed, discounted or otherwise by leveraging the National Automated Clearing House (NACH) system used for TReDS. The timeline for settlement of funds shall be subject to the regulations of the TReDS guidelines along with other relevant laws like the Micro, Small and Medium Enterprise Development Act, 2006.

• Increasing the Number of Financiers

Transactions on TReDS falls under the scope of ‘factoring business,’ and financial institutions like banks, Non-Banking Financial Company (NBFC)-Factors, etc., (as allowed by RBI) can, as of now, participate as financiers on the platform. Certain entities/institutions are allowed to take up factoring transactions under the provisions of the Factoring regulations Act (FRA), 2011. As such, all entities/institutions are permitted to take up factoring business and participate on the platform as financiers under the FRA and the rules mentioned thereunder. This contributes towards increasing the number of financiers available on TReDS platforms.

• Bid Display

TReDS platforms enable competitive bidding between financiers while maintaining complete transparency. To make it even more transparent, platforms are required to display the bids place on an FU to all the bidders. However, the name of the bidders must not be revealed.

• Introduces Secondary Market to factor transactions on TReDS

Although it has not been introduced yet, TReDS guidelines offer a secondary market for discounted/financed Factoring Units (FUs). Considering their experience, operators of the platform may choose to, at their discretion, introduce a secondary market for FU transfers within the same platform. It must be noted that these transfers shall be subject to the relevant provisions of RBI’s ‘Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021’, dated 24 September 2021. This includes the transferor’s/transferee’s eligibility as stated in paragraph 3 of the Master Direction.

Conclusion

As TReDS continues to evolve, the platform’s efforts to increase the number of financiers available shall add to the growth and sustainability of Micro, Small and Medium Enterprises in India. Besides, the move to permit operators of TReDS platform to take up FU settlements makes it easier to manage funds, improves convenience and makes sure everything complies with relevant laws and regulations.