Despite their importance to the country's economy, Micro, Small, and Medium Enterprises (MSMEs) continue to face difficulties obtaining adequate financing, particularly in converting trade receivables into liquid funds.
Did you know? In March 2014, the RBI published a concept paper on "Micro, Small & Medium Enterprises (MSME) Factoring-Trade Receivables Exchange" to address this pan-India issue by establishing an institutional structure for financing trade receivables.
What does TReDS mean?
TReDS stands for Trade Receivables Exchange Discounting Scheme. It is a strategy for establishing and managing an institutional structure to make it easier for MSMEs to finance their trade receivables from corporate and other customers, such as Government Agencies and Public Enterprises (PSUs), through various financiers (TReDS).
TReDS simplifies uploading, accepting, discounting, trading and settling invoices/bills of MSMEs.
TReDS can manage both receivables and reverse factoring, enabling larger transaction volumes and better pricing.
Participants of the TReDS scheme
MSME vendors, corporates, and other customers (including government departments and PSUs) and financiers are the direct participants in the TReDS (banks, NBFC Factors, and other financial institutions approved by the Reserve Bank of India).
TReDS acts as a hub for numerous parties to connect to. It simplifies the uploading, acceptance, discounting, trading, and payment of MSMEs' invoices and bills.
Sellers' and purchasers' bankers are provided access to the system if necessary to obtain information on their customers' discounted invoices/bills portfolios.
TReDS may develop agreements with technology providers, system integrators, and organisations that provide dematerialisation services to deliver its services.
How does TReDS work?
During TReDS financing/discounting, the following procedures take place in general:
- The MSME seller (in case of factoring) or the buyer (in case of reverse factoring) creates a Factoring Unit (FU) - standard TReDS nomenclature for invoice(s) or bill(s) of exchange - containing details of invoices/bills of exchange (evidencing sale of goods/services by MSME sellers to buyers) on TReDS platform.
- Acceptance of the FU by the counterparty - either the buyer or the seller, depending on the situation;
- Financiers' bidding;
- The seller or the buyer, as the case may be, chooses the best bid;
- Payment to the MSME seller by the financier (of the selected bid) at the agreed-upon financing / discounted rate;
- On-time payment by the buyer to the financier.
TReDS is not mandatory for any buyer, seller, or funder, according to the RBI. Buyers have been lukewarm in their response to TReDs. Internal processes, indifferent attitude regarding payments to MSMEs, balance sheet related compulsions, and so on could all be reasons for their reluctance. As a result, the government has made it mandatory for some businesses to register as buyers on the TReDS network(s). However, the government mandate does not require these firms to conduct transactions in TReDS.
What are the benefits of TReDS?
For Buyers
- Improved cash flow: Get access to your working money. When you sell an invoice, you'll get paid within 24 hours.
- Reduced cost of funds: Make the most of your credit profile to get the best rate of return on your investment.
- Best cost of funds: Multiple financiers are available for a low cost of money.
- No debt, no collateral: Receive payment for receivables. Make sure you don't take on any debt on your books.
For Sellers
- Streamlined vendor payments: All vendor payments can be made in one place.
- Seamless ERP integration: This facilitates easy ERP system connectivity as data can be processed in a fraction of the time.
- Improved procurement: This enables immediate payments, which improves the working relationship.
- Flexible payment terms: This allows for a variety of repayment options.
For Financiers
- PSL accreditation: Priority sector lending is available for all funds distributed through Invoicemart.
- Expansion of business: Access to top-tier corporations and their MSME vendors
- Easy reconciliation: Custom reports and data extraction are available for easy reconciliation.
- Low-risk: Because the buyers are top-rated, there is a low danger of default.
What are the advantages of the TReDS scheme?
- Detailed knowledge of supply chain finance and the marketplace
- Secure origination and settlement methods based on technology
- Intuitive and best-in-class user interface
- Compliance with KYC and customer onboarding, as well as a unique risk rule engine
- Through an open API, the client’s ERP systems can be integrated.
Also Read: RBI raises NACH Mandate Limit for TReDS Settlement, Move to Help MSMEs
What is M1xchange
Mynd Solutions Pvt Limited has been granted permission by the Reserve Bank of India to create and operate M1xchange, India's first trade receivables exchange. M1xchange has revolutionised how MSMEs acquire working capital from various lenders by digitising the process. TReDS is an effective strategy to move the MSME sector into another era of the Indian economy and a remedy to MSMEs' chronic cash flow concerns in India.
On November 2, 2018, the Department of Micro, Small, and Medium Enterprises issued a notification mandating TReDS registration for all corporations registered under the Companies Act with a revenue of over ₹500 crores and all Central Public Sector Enterprises.
The Registrar of Companies (RoC) has been selected as the appropriate authority to ensure compliance in each state.
MSMEs have better access to funding at reduced rates and without the need for additional collateral.
In addition, the MSMEs have no recourse against the loan. Corporate procurement costs are reduced by negotiating better financing arrangements with vendors.
Financiers can build a PSL asset portfolio on Trade Receivable Exchange platforms like M1xchange.
TReDS Registration process
TReDS registration involves a standardised system and process for enrolling customers and sellers.
Registration is processed through any one of the following portals -
- RXIL (Receivables Exchange of India Ltd)
- Invoicemart (TREDS Ltd)
- M1 Exchange (Mynd Solutions)
Apart from a one-time agreement between the parties involved, following documentation are needed -
- Application Form
- Master Agreement
- Bank Confirmation Letter
- Mandate form for debiting the designated bank account (applicable for Financiers and Buyers)
- KYC documents of the applicant entity, promoters, administrator, authorized signatories etc.
Participants in TReDS would sign a one-time contract that reads as follows
(a) The TReDS and the financier have signed a master agreement describing the terms and conditions of their transactions.
(b) The buyers' and TReDS' master agreement spells forth the terms and conditions of their transactions. The following points should be included explicitly in this agreement:
(i) The buyers (companies and other consumers, including government agencies and PSUs as the case may be) required to pay on the due date are met once the factoring unit is approved online.
(ii) If there is a disagreement regarding the quality of products or anything else, there is no recourse.
(iii) No set-offs will be permitted.
The master agreement between the MSME vendors and the TReDS spells out the terms and conditions of their business relationship.
The agreement should also include a declaration/undertaking by the MSME seller that no working capital financing bank extends finance about the products and services underlying the factoring unit. Such products and services are not charged to the working capital financing.
If invoice financing is employed, an assignment agreement between the MSME seller and the financier is required. Alternatively, this functionality might be included in the MSME seller-lender agreement, saying that any financing transaction on TReDS will be viewed as a receivable assignment in favour of whoever is the financier.
The TReDS will keep track of all agreements.
- Master Agreements may include other procedural aspects of TReDS operation and functioning if the parties so request or in the Procedural Guidelines if applicable. Even if they are included in the Master Agreements, such operational components should always comply with current regulatory requirements. Any judicial cases brought by one organisation against another, if any, may be stated in the Master Agreement as falling outside of TReDS' jurisdiction.
- TReDS will review the need for CERSAI registration for the assignments listed above as soon as practicable after a factoring unit has been approved for financing by a financier and placed in place a suitable mechanism for it (preferably driven automatically through the factoring unit).
Conclusion
We hope this article has provided you with in-depth knowledge about the TReDS Scheme, its purpose, the registration process, and its advantages.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.
