Skip to main content

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


Follow at - Telegram   Instagram   LinkedIn   Twitter   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Report of the Committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector

Reserve Bank of India (RBI) has released the report of the committee to develop a framework for responsible and ethical enablement of artificial intelligence (FREE-AI) in the financial sector. Committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector In the financial sector, Artificial Intelligence (AI) has the potential to unlock new forms of customer engagement, enable alternate approaches to credit assessment, risk monitoring, fraud detection, and offer new supervisory tools. At the same time, increased adoption of AI could lead to new risks like bias and lack of explainability, as well as amplifying existing challenges to data protection, cybersecurity, among others. To encourage the responsible and ethical adoption of AI in the financial sector, the committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector (Chairperson: Dr. Pushpak B...
Post a Comment
Read more

Lending against Gold and Silver collateral

Reserve Bank of India (RBI) has issued directions on lending against the collateral of gold and silver. To whom are the directions applicable? The directions are applicable to the following regulated entities (REs) – Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks, but excluding Payments Banks). Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs). Which loans are covered under the directions? The directions shall apply to all loans offered by an RE for the purpose of consumption or income generation (including farm credit) where eligible gold or silver collateral is accepted as a collateral security. What is eligible collateral? Eligible collateral means the collateral of jewellery, ornaments or coins made of gold or silver. A lender shall not grant any ad...
Post a Comment
Read more

All about RBI Integrated Ombudsman Scheme, 2021

Filed a complaint against a bank / financial institution but haven’t received a reply for more 30 days? Or received a reply but not satisfied with the resolution offered by the bank / financial institution? Or the complaint was rejected by the bank / financial institution? You can approach RBI Ombudsman under the RBI Integrated Ombudsman Scheme, 2021. What is RBI Integrated Ombudsman Scheme (RBI-IOS), 2021? RBI-IOS was launched on November 12, 2021, by integrating the existing 3 Ombudsman schemes of RBI. RBI-IOS adopts ‘One Nation One Ombudsman’ approach by making the RBI Ombudsman mechanism jurisdiction neutral. It provides cost-free redress of customer complaints involving deficiency in services rendered by entities regulated by RBI. Which schemes are integrated in RBI-IOS? RBI-IOS integrates following existing schemes of RBI – Schemes Powers derived from Entities covered Banking Ombudsman Scheme, 2006 Section 35A of BR Act, 1949 S...
Post a Comment
Read more

Investments in Debt Instruments by Non-residents

Reserve Bank of India (RBI) has issued directions on investments in debt instruments by non-residents. What are the channels for investments in debt instruments by non-residents? General Route – for investment in Government securities and corporate debt securities by Foreign Portfolio Investors (FPIs) subject to specified investment limits and macro-prudential limits. Voluntary Retention Route (VRR) – for investments in Government securities and corporate debt securities, free of certain macro-prudential limits applicable to FPI investments in debt markets under the General Route, by FPIs that commit to remain invested for a stipulated retention period. Fully Accessible Route (FAR) – for investments by non-residents in certain specified categories of Central Government securities (‘specified securities’) without any restriction. Scheme for Trading and Settlement of Sovereign Green Bonds (SGrBs) issued by the Central Government by eligible foreign investors in the International Finan...
Post a Comment
Read more

Continuous Clearing and Settlement on Realisation in Cheque Truncation System (CTS)

Reserve Bank of India (RBI) has issued direction on continuous clearing and settlement on realisation in Cheque Truncation System (CTS). What is Cheque Truncation System (CTS)? Cheque Truncation System (CTS) involves halting the physical movement of the cheque and its replacement by images of the instrument and the corresponding data contained in the MICR line.  In CTS, 3 images are taken of each cheque – front Gray Scale, front Black & White and back Black & White. MICR (Magnetic Ink Character Recognition) is a 9-digit code printed at the bottom of cheques using magnetic ink – first 3 digits indicate City Code, middle 3 digits indicate Bank Code and the last 3 digits indicate Bank Branch Code. Only CTS-2010 standards compliant instruments can be presented for clearing through CTS. The presenting banks which truncates the cheques need to preserve the physical instruments for 10 years. From when will the continuous clearing and settlement on realisation in CTS be implemented...
Post a Comment
Read more