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

Digital Payments – E-mandate Framework 2026

Reserve Bank of India (RBI) has issued e-mandate framework for digital payments. What is an e-mandate?  A mandate is a standard instruction that a customer provides to his / her issuing bank and other institutions allowing them to automatically debit the mentioned amount from his / her bank account. e-mandate is the electronic version of it. To whom shall the framework be applicable? The framework shall be applicable to Payment System Providers and Payment System Participants. To which transactions shall the framework be applicable? The framework shall be applicable to processing of recurring transactions, domestic or cross-border, using cards / Prepaid Payment Instrument (PPI) / Unified Payments Interface (UPI). What are the guidelines for registration and revocation of e-mandate? A customer desirous of opting for e-mandate facility shall undertake a one-time registration process. The mandate shall be registered only after successful validation of additional factor of authenticati...
Post a Comment
Read more

Utkarsh 2029

Reserve Bank of India (RBI) has published its medium-term strategy framework – Utkarsh 2029, for the period April 2026 to March 2029. Utkarsh RBI had first formulated its medium-term strategy framework, viz. ‘Utkarsh 2022’ for the period 2019-2022 in July 2019, replacing its annual action plans as the latter spanned over a short period, insufficient to pursue strategic objectives.  The strategic framework contained, inter alia, RBI’s Mission, Core Purpose, Values and Vision Statements, reiterating RBI’s commitment to the Nation. It became a medium-term strategy document guiding RBI’s progress towards realisation of the identified milestones. The subsequent strategy framework, i.e., ‘Utkarsh 2.0’, spanned the period 2023-25. Utkarsh 2029  Utkarsh 2029 is the medium-term strategy framework for the period April 2026 to March 2029. Utkarsh 2029 has a 3-layered structure consisting of strategy pillars guided by the vision and values of RBI. Vision of Utkarsh 2029 – Continue excelle...
Post a Comment
Read more

Treatment of Wilful Defaulters and Large Defaulters

Reserve Bank of India (RBI) had issued the directions on treatment of wilful defaulters and large defaulters. To whom shall the directions be applicable? The directions shall be applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Local Area Banks (LABs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) Central Co-operative Banks (CCBs) All India Financial Institutions (AIFIs) regulated by RBI – Export Import Bank of India (EXIM Bank) National Bank for Agriculture and Rural Development (NABARD) National Housing Bank (NHB) Small Industries Development Bank of India (SIDBI) National Bank for Financing Infrastructure and Development (NaBFID) Non-Banking Financial Companies (NBFCs) categorized as Middle Layer and above layers – Deposit taking NBFC (NBFC-D) NBFC-Investment and Credit Companies (NBFC-ICC) NBFC-Factor  NBFC-Micro Finance Institutions (NBFC-MF...
Post a Comment
Read more

Credit Information Reporting

Reserve Bank of India (RBI) had issued directions on credit information reporting by the regulated entities. What are Credit Information Companies (CICs)? Credit Information Companies (CICs) mean companies that have been granted a certificate of registration by RBI under section 5 of the Credit Information Companies (Regulations) Act, 2005 (CICRA).  The following CICs are registered with RBI – CRIF High Mark Credit Information Services Private Limited Equifax Credit Information Services Private Limited Experian Credit Information Company of India Private Limited TransUnion CIBIL Limited What are Credit Institutions (CIs)? Credit Institutions (CIs) mean the following institutions – Commercial Banks  Small Finance Banks (SFBs) Local Area Banks (LABs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) Central Co-operative Banks (CCBs) All India Financial Institutions (AIFIs) regulated by RBI – Export I...
Post a Comment
Read more

Guidelines to facilitate faster cross-border inward payments

Reserve Bank of India (RBI) has issued guidelines to facilitate faster cross-border inward payments. What is the rationale behind the guidelines? The RBI’s Payments Vision 2025 aims to bring efficiency in the cross-border payments aligning with the G20 roadmap for cross-border payments that has set targets for achieving cheaper, faster, more transparent, and more accessible cross-border payments. One of the challenges with speed of cross-border payments is experienced at the beneficiary leg i.e., the time taken from receipt of the payment at the beneficiary bank till credit to the beneficiary account. What are the guidelines to facilitate faster cross-border inward payments? Banks shall inform their customer of the receipt of cross-border inward transactions immediately on receipt of inward message. Messages received after close of operating hours of banks shall be informed to customer immediately at the start of the next business day. Banks shall undertake reconciliation and confirmat...
1 comment
Read more