The Micro, Small and Medium Enterprises (MSME) sector plays a crucial role in the Indian economy, contributing to 45% of the country’s industrial output and 40% of its exports. Despite this, MSMEs face several challenges in obtaining access to credit and financing. This is where the Trade Receivable Discounting System (TReDS) comes in.
Introduction to TReDS
TReDS is a platform that connects corporations, MSMEs, financial institutions, and government buyers, facilitating the financing, discounting, trading, and settlement of invoices for MSMEs. All transactions processed on the platform are recourse-free for MSMEs, which means that the risk of non-payment is borne by the financier and not the MSME. This platform operates under the provisions of the Payment and Settlement Systems (PSS) Act, 2007, and is authorized by the Reserve Bank of India (RBI).
Expanding TReDS for Increased Liquidity for MSMEs
To further increase liquidity for MSMEs, the RBI has proposed to expand the scope of TReDS. The proposal will allow entities that are eligible to undertake factoring business to participate as financiers on the platform. This will facilitate secondary market operations on TReDS, leading to an increase in the flow of funds to MSMEs.
Factoring is a financial transaction where a company sells its accounts receivable (invoices) at a discount to a factoring company in exchange for immediate cash. The factoring company assumes the risk of non-payment and takes over the task of collecting the payments from the customers. By allowing entities engaged in factoring business to participate as financiers on TReDS, MSMEs will have access to a wider range of financiers, leading to increased competition and reduced costs.
Benefits for MSMEs
The expansion of TReDS will have several benefits for MSMEs, including:
Increased Liquidity: MSMEs will have access to a wider range of financiers, leading to an increase in the flow of funds to the sector. This will help MSMEs to overcome the challenges of accessing credit and financing, boosting their operations and growth.
Lower Costs
The increase in competition among financiers on TReDS will lead to a reduction in the costs associated with financing, such as interest rates, factoring fees, and processing charges.
Increased Transparency
TReDS operates as an electronic platform, providing a transparent and secure environment for MSMEs to access financing. The expansion of TReDS will increase the transparency of MSME financing, reducing the risk of fraud and exploitation.
Faster Processing
The electronic platform of TReDS enables faster processing of invoices, reducing the time required for MSMEs to access financing. This will help MSMEs to manage their cash flows more efficiently, reducing the risk of liquidity crises.
