Whenever we run a business, managing funds for Day to day business needs i.e. Working capital becomes a major important area to focus on. And when it comes to micro, small & medium enterprises access to working capital funding is not an easy goal to achieve.
Ministry for MSME, GOI identified this issue and thus came up with a unique scheme which is truly unique in its own era, The TReDS i.e. Trade Receivable Discounting System.
Micro Small & Medium Enterprises (MSMEs) plays an important role in economic fabric of the country and act as complementary to large industries as ancillary units. Moreover this sector contributes enormously to the socio economic development of the country as providing large employment opportunities at comparatively lower capital cost than large industries which in turn helps in industrialization of rural & backward area too.
The working capital need arises due to credit sale and Inventory holding requirement as well as several direct & indirect cash expenditure. The working capital need which arise due to credit sale is being financed through the scheme which we are talking about.
TReDS deals with factoring arrangement of trade receivable due from corporate and other buyers including Government departments as well as public sector undertaking. Factoring arrangements thereby means financing the trade receivables of MSMEs (which are owed by corporate and other buyers) through financiers who are banks, NBFC and other financial institution as permitted by RBI.
The scheme involves 03 participants in particular;
- Seller i.e. MSME unit who have the trade receivables
- Buyer i.e. corporates and other buyers who owe the trade receivables of MSME unit.
- Financier i.e. Banks, NBFC & others who will provide working capital finance to MSME unit against their trade receivables, obviously at a discount which is the interest cost actually charged by bank for financing trade receivables of MSMEs.
How the scheme will operate
The scheme operates through Receivable Exchange of India limited commonly known as RXIL. RXIL is a joint venture between SIDBI & NSE and formed in February 2016 in accordance with guidelines issued by RBI in December 2014.
The scheme is all about interaction of Seller & buyer at electronic platform and financing their trade receivables through multiple financiers available on the same electronic platform. By this way Seller gets the money against his trade receivable instantly, Buyer also enjoys the same credit period and pays off at the end but instead of seller MSMEs, it pays off to financier who earns interest cost.
The steps in whole TReDS scheme arrangement are as under;
Unique features of the scheme;
- Unified platform for MSME Seller, Buyer & Financiers: common portal where all there related party can transact and that too in a transparent way.
- Digital framework and no use of paper: The invoice details need to be entered along with scan copy of invoice. Auction will happen electronically, acceptance provided and then payment will be credited & debited electronically. So no involvement of papers at all.
- Easy & hassle free access to funds: No need to visit bank branch and carry the documents and all. Financing of receivables can now be done in office even through RXIL India’s first TReDS Platform.
- Competitive discount rates: Unlike earlier format of bills discounting for every invoice Auction happens and bids are offered by financier. The most favorable bid is obviously accepted by buyer and hence discount rates are highly competitive one.
- Seller: The seller should be MSME unit i.e. should have Udyog Aadhar number and name should be in MSME Data Bank. The seller should be into business for more than one year.
- Buyer: Currently corporates having turnover more than 500 crore and all central Public sector undertakings are mandatorily supposed to register themselves on portal. Moreover if for any seller buyer is not registered on portal it may send request for that or even pass on the contact details of buyer to RXIL team and then RXIL team will reach to them for registration.
- Financiers: Banks, NBFC & other institutions as approved by RBI.
The scheme is quite good and offers a wide array so far as working capital finance to MSMEs is concerned. The methods are transparent, bids are competitive and the most important thing that the whole process is hassle free. No need to visit anywhere, transactions can be executed online through own computer even.
But as with every scheme arrangement along with its benefits certain shortcomings are bound to occur and TReDS is also not an exception.
The transaction at TReDS platform can be initiated if and only if the buyer accepts the invoice uploaded by Seller MSME and the biggest hurdle is that it not mandatory for buyers to register themselves on portal. However recently in Nov 18, RBI had mandated central PSUs and companies having more than 500 Crore turnover to get them registered.
Moreover the credit period of 45 days is also being objected by many Companies as they believe that they can get even better credit period.
Every Invoice uploaded is mandatorily required to be registered with CERSAI which contains every time registration cost of Rs. 750/- which makes transaction somehow costly.
Anyhow, it’s a welcome step by government and can work good even if the shortcomings will be better taken care off.