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What is Trade Receivables Discounting System (TReDS)?

Reserve Bank of India (RBI) has expanded the scope of Trade Receivables Discounting System (TReDS).

What is Trade Receivables Discounting System (TReDS)?

Trade Receivables Discounting System (TReDS) is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. 

These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).

What are the features of TReDS?

  • TReDS facilitates uploading, accepting, discounting, trading and settlement of both invoices as well as bills of exchange of MSMEs. 
  • The transactions processed under TReDS are “without recourse” to the MSMEs i.e. the MSME seller doesn’t have to pay to the financier in case the buyer defaults in repayment.
  • TReDS are not allowed to assume any credit risk.
  • TReDS transactions are settled through National Automated Clearing House (NACH).

What is Factoring Unit (FU)?

  • Factoring Unit (FU) is a standard nomenclature used in TReDS for an invoice or a bill of exchange (evidencing sale of goods / services by the MSME sellers to the buyers). 
  • In TReDS, FU can be created either by the MSME seller or the buyer. If the MSME seller creates it, the process is called ‘factoring’; if the same is created by corporates or other buyers, it is called as ‘reverse factoring’.

Who are the financiers in TReDS?

Financier refers to banks, NBFC Factors and other financial institutions (as permitted by RBI) participating in the TReDS and accepting FU for financing purpose.

Who are the participants in TReDS?

  • MSME sellers
  • Corporate and other buyers, including Government Departments and PSUs
  • Financiers (banks, NBFC Factors and other financial institutions) 
  • Insurance companies

How does TReDS work?

Broadly, following steps take place during financing / discounting through TReDS –

  • Creation of FU on TReDS platform by the MSME seller (in case of factoring) or the buyer (in case of reverse factoring).
  • Acceptance of the FU by the counterparty - buyer or the seller, as the case may be.
  • Bidding by financiers.
  • Selection of best bid by the seller or the buyer, as the case may be.
  • Payment made by the financier (of the selected bid) to the MSME seller at the agreed rate of financing / discounting.
  • Payment by the buyer to the financier on the due date.

Who is eligible to set up and operate TReDS?

Entities desirous of setting up and operating TReDS should fulfil the following criteria –

  • Minimum paid up equity capital shall be ₹25 crore.
  • Entities, other than the promoters, are not permitted to have shareholding in excess of 10% of the equity capital of the TReDS.
  • The entities and their promoters / promoter groups should be ‘fit and proper’. RBI assesses the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and track record of at least 5 years in running their businesses. 
  • TReDS should have sound technological system operated on a real-time basis. 

Which are the entities presently authorised to operate TReDS?

  • A.TREDS Limited – TReDS system known as “INVOICEMART”
  • Mynd Solutions Private Limited – TReDS system known as M1xchange
  • Receivables Exchange of India Limited (RXIL) – TReDS system known as RXIL

One more entity has been given in-principle authorisation to operate such platform.

What are the recent updates in TReDS guidelines?

Facilitate insurance for transactions 

  • Financiers place their bids on the TReDS platforms keeping in view the credit rating of buyers. They are generally not inclined to bid for payables of low rated buyers. 
  • To overcome this, insurance facility is being permitted for TReDS transactions, which would aid financiers to hedge default risks, subject to the following –
    • Apart from MSME sellers, buyers and financiers, insurance companies are permitted to participate as “fourth participant” in TReDS.
    • Premium for insurance shall not be levied on the MSME seller.
    • Collection of premium and related activities could be enabled through NACH system used for settlement of TReDS transactions.
    • The credit insurance shall not be treated as a Credit Risk Mitigant (CRM) to avail any prudential benefits.

Expand the pool of financiers 

  • TReDS transactions fall under the ambit of “factoring business”, and banks, NBFC-Factors and other financial institutions (as permitted by RBI) can presently participate as financiers in TReDS. 
  • The Factoring Regulation Act, 2011 (FRA) allows certain other entities / institutions to undertake factoring transactions. Accordingly, all entities / institutions allowed to undertake factoring business under FRA are now permitted to participate as financiers in TReDS. 

Enable secondary market for FUs

  • TReDS guidelines provide for the discounted / financed FUs to have a secondary market, which is, however, not introduced yet. 
  • TReDS platform operators may, at their discretion, enable a secondary market for transfer of FUs within the same TReDS platform. 

Settlement of FUs not discounted / financed 

  • On an average, 17% of FUs uploaded on TReDS platforms are not discounted / financed; for such FUs, TReDS guidelines require buyers to pay MSME sellers outside the system. 
  • To overcome the inconvenience caused to MSME sellers and buyers as well as for better reconciliation, TReDS platform operators shall now be permitted to undertake settlement of all FUs – financed / discounted or otherwise – using the NACH mechanism used for TReDS. 

Display of bids 

  • TReDS platforms facilitate transparent and competitive bidding by the financiers. 
  • To make the process more transparent, the platforms may display details of bids placed for an FU to other bidders; name of the bidder shall, however, not be revealed.


References

Reserve Bank of India. (2018, July 02). 'Guidelines for the Trade Receivables Discounting System (TReDS)'. Retrieved from https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3504

Reserve Bank of India. (2020, January 01). 'FAQ - Trade Receivables Discounting System (TReDS)'. Retrieved from https://www.rbi.org.in/Scripts/FAQView.aspx?Id=132

Reserve Bank of India. (2023, June 30). 'Certificates of Authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 for Setting up and Operating Payment System in India'. Retrieved from https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=12043

Reserve Bank of India. (2023, June 07). 'Expanding the Scope of Trade Receivables Discounting System'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12510&Mode=0


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