Credit and Finance for MSMEs: The government’s public policy think-tank NITI Aayog has said that TReDS’ bill discounting platforms are yet to see meaningful growth. In a report proposing licensing and regulatory framework for digital banks in India on Wednesday, NITI Aayog said while TReDS being “sound in theory as observed by the U K Sinha Committee, the bill discounting platforms have failed to take off and create meaningful volumes of invoice discounting.”
TReDS as a concept was introduced by RBI back in 2014 towards addressing the working capital challenge for MSMEs due to delays in payment from their public and private buyers. M1xchange along with Invoicemart (joint venture of Axis Bank and mjunction services), and RXIL (joint venture between SIDBI and NSE) were the three platforms issued licenses by RBI in 2017 to operate on the TReDS mechanism.
The aayog cited three reasons for the slow growth of TReDS’ platforms; first, lack of corporate buyer incentive. According to NITI Aayog, the procedural guidelines are too restrictive as the buyer is required to relinquish any rights to dispute the service or goods delivered at the time it accepts the invoice to be discounted. “While this is assuring for the financing parties, it inhibits the corporate buyer from onboarding in the first place because it would be waiving its rights to dispute the goods and services by accepting the “factoring unit”, the report said.
Moreover, as these platforms are meant only for the MSME suppliers, they deter corporate buyers with diverse supply chains that may have non-MSME suppliers. The report added that they may be reluctant to bifurcate and operate two invoice discounting systems.
Second, many corporate buyers already have corporate treasury departments that operate their own reverse factoring programs for their supplier ecosystem. Hence, the traction is low. The report added that other banks also including SBI offer similar programmes for their clients, vendor, and dealer financing.
Third, there are shallow pools of financing capital. “Only entities regulated by the Reserve Bank of India can bid on these platforms. In fact, till the recent enactment of the Factoring (Amendment) Act, 2021, only a limited set of NBFCs (NBFC-Factors) other than banks were permitted to finance through these platforms,” it noted.
However, according to Sundeep Mohindru, CEO, M1xchange, TReDS had already discounted invoices worth Rs 75,000 crore till March 2022. “From 2017 to 2021, TReDS discounted invoices worth Rs 37,000 crore for MSMEs while in 2021-22 itself, Rs 38,000 crore invoices were discounted. For the current FY23, the expected volume of discounting will be in excess of Rs 75,000 crore itself,” he told Financial Express Online.
The volume of invoices that can be discounted is a play of how much liquidity is available on TReDS and once NBFCs start transactions on TReDS, the positive impact in terms of the value of invoices discounted will be at least over 3X, Mohindru explained. He further noted, “The borrowing cost for MSMEs via TReDS at 4-6 per cent is much lower than 12-15 per cent in borrowing from banks directly. The lower cost not just helps MSMEs become more competitive but their large customers as well whom they supply goods at competitive prices.”
Importantly, the government back in 2018 had asked public sector enterprises and all companies with a turnover of Rs 500 crore or more to register on TReDS. In September 2020 as well, the MSME Ministry had written to 500 corporates for clearing MSMEs dues and urged them to onboard TReDS. However, MSME Minister Narayan Rane had informed Parliament in March this year that the Reserve Bank of India has not made it compulsory for any buyer, seller or financier to participate on the platform.