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What Is TReDS? A Complete Guide To Trade Receivables Discounting System And Criteria for Establishing and Operating the TReDS

A Complete Guide to TReDS Platform

The RBI launched the Trade Receivables Discounting System in 2018. Small businesses may benefit from the platform today more than ever before.

In this article, we’ll look at the various features of the TReDS platform that all MSMEs should be aware of. By registering on the platform, you will also learn how to manage your working capital.

Learn more about – What Are MSMEs? Its Definition, Benefits, Registration Process And Classifications Explained

What is TReDS?

MSMEs continue to struggle with unpaid invoices from vendors, and COVID has only added to their woes. The Trade Receivables Discounting System or TReDS is an online platform that allows MSME suppliers to discount their bills and invoices. The RBI launched the Trade Receivables Discounting System in 2018.

The platform enables MSMEs to receive payments more quickly. For SMEs, the platform also has a reduced annual interest payout.

The TReDS’ main purpose is to allow MSME sellers to discount invoices raised against major corporations, which helps them manage their working capital demands.

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“TReDS would make it easier to discount both invoices and bills of exchange.” – A representative for the RBI

What is Invoice Discounting?

Businesses can use invoice discounting to acquire immediate access to funds held in outstanding invoices and tap into the value of their sales ledger. It’s straightforward: when you invoice a customer or client, the lender gives you a share of the amount, boosting your cash flow.

Invoice discounting can also be thought of as a series of short-term business loans backed by invoices. To put it another way, the lender is aware that you owe them money and is willing to lend you the majority of it before your customer pays you.

While waiting for clients to pay invoices, small-to-medium-sized businesses’ cash flow might be stressed. This difficulty can be solved by using invoice discounting.

TReDS Background

TReDS was first presented by the central bank in 2014, and three platforms were granted licenses to operate on the TReDS mechanism in 2017, including Mynd Solutions’ M1Xchange, Invoicemart (a joint venture between mjunction services and Axis Bank ), and RXIL (a joint venture between NSE and SIDBI).

TReDS Features

  • MSME sellers, corporate buyers, and banks are all connected through the same platform.
  • Complete your transactions online.
  • No paperwork required, and quick access to funds
  • Standardized Procedures for Continuous Data Flow
  • Discount rates that are competitive
  • Within 24-72 hours, you’ll have access to working capital.
  • Working Capital with No Collateral
  • In approximately 24-72 hours, you can get access to working capital by bill discounting your unpaid invoices.
  • Cash Cycles that are Shorter – Get quick access to working capital and shorten your business’s financial cycles.
  • Off-balance-sheet – M1xchange provides a collateral-free bill discounting service that has no negative influence on your financial statements.
  • Business Development – With quick access to funds say yes to business growth and expansion.

TReDS Advantages

For Buyers:

  • By enrolling on TReDS, the buyer can properly track its cash flow.
  • It ensures that payment cycles are smooth and error-free.
  • It only takes a small amount of paperwork and money. Transparency is essential.

For Sellers:

  • In a reasonable amount of time, the vendor will be able to acquire a receipt of funds.
  • It only takes a small amount of paperwork and money.

For Financer:

  • The Financer may have access to a broader market.
  • TReDS ensures instrument qualification.
  • It reduces operational costs.

Learn more about – Benefits Of MSME Registration In India

Drawbacks of TReDS

The identity of MSME suppliers are a source of concern for large corporations. Because large firms are hesitant to file invoices online for fear of their competitors discovering their MSME suppliers, the Reserve Bank of India and the government may need to rethink the Trade Receivables e-Discounting System.

Businesses should also be concerned about the fact that, because TReDS is a transparent system, they must settle supplier invoices within 45 days of receiving goods or services.

According to a senior banker familiar with TReDs developments, the Receivables Exchange of India (RXIL), an embryonic platform for discounting trade receivables of micro, small, and medium businesses (MSMEs), looks to be having teething problems.

RXIL, India’s first TReDS platform, started in January 2017. SIDBI, in partnership with NSE and three banks, developed the platform (SBI, ICICI Bank and YES Bank). TReDS is an online electronic institutional system that allows MSMEs to borrow money from a range of lenders to finance their trade receivables.

The TReDS platform enables MSME sellers to use an auction mechanism to discount invoices/bills of exchange against big companies, such as government departments and public sector entities, assuring the prompt realization of trade receivables at market rates.

A number of financiers are in attendance at the auction. It addresses MSMEs’ twin issues of prompt receivables encashing and the removal of credit risk.

The banker remarked, “There are two concerns limiting TReDS’ full-fledged take-off.” For one thing, many companies believe that their competitors will be able to figure out where they source their materials. Two, firms often prefer to give lengthier credit terms to suppliers and will not recover receivables within 45 days.”

According to him, many organizations have warned their MSME buyers that they will not take bills on the site. RXIL has already waived the registration fee and transaction fees on its platform twice, from January 6 to April 30, 2017, and May 1 to June 30, 2017.

Criteria for Establishing and Operating the TReDS

Entities interested in developing and operating the TReDS must meet the following requirements.

1. Budgetary requirements

  • The TReDS’ minimum paid-up equity capital will be Rs. 25 crore because it will not be authorized to take on any credit risk.
  • Foreign ownership of the TReDS will be governed by the current foreign investment policy.
  • Entities other than the promoters will be prohibited from owning more than 10% of the TReDS’ equity capital.

2. Due diligence on the part of the promoters

Organizations and their promoters/promoter groups must be “fit and suitable” to serve as TReDS, as defined by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. The RBI will judge the applicants’ ‘fit and appropriate’ status based on their previous track record of sound credentials and integrity, as well as their financial soundness and a track record of at least five years of running their businesses. Other regulators and enforcement and investigative agencies, such as the Income Tax Department, the CBI, the Enforcement Directorate, and the Securities and Exchange Board of India, may, if necessary, request feedback on the candidates.

3. Capabilities in terms of technology

The TReDS should have a strong technological base to support its operations. As a result, the TReDS should at the very least meet the following technological requirements.

  • TReDS must be able to provide an electronic platform to all participants.
  • The TReDS must have a proper Business Continuity Plan (BCP), which includes a disaster recovery site and an online surveillance capability that monitors positions, prices, and volumes in real-time to prevent system manipulation.
  • The TReDS must have a proper Business Continuity Plan (BCP), which includes a disaster recovery site and an online surveillance capability that monitors positions, prices, and volumes in real-time to prevent system manipulation.

Application Procedure for Authorisation

This pdf document by RBI provides both the fundamental guidelines and the application format for any non-bank company requesting authorization to operate a payment system under the PSS Act.

Entities interested in establishing the TReDS and meeting the eligibility requirements specified in the Guidelines can submit an application in the prescribed format to the Reserve Bank of India, 14th Floor, Central Office Building, Shaheed Bhagat Singh Marg, Mumbai – 400001.

How the TReDS Platform May Assist MSMEs Manage Their Working Capital?

TReDS is a software platform. TReDS experts recommended that MSMEs explore using the platform to get funds on August 29, 2020. The platform enables MSMEs to get funds in advance, allowing them to handle any working capital issues and better manage their businesses. Because it is an off-balance sheet transaction, discounting receivables can be a suitable source of funding for cash-strapped MSMEs, according to the center.

Small firms can use the TReDS platform to raise working capital by auctioning their trade receivables.

Before the due date or before the buyer makes the payment, a financier or bank bids on a bill (trade receivable) from an MSME.

“The TReDs platform is an excellent way for MSMEs to meet their liquidity needs.” — Sanjeev Chawla, MSME-DI Director

Learn more about –Working Capital Optimization – Explore 10 Ways To Improve Working Capital

Creating an Account on the TReDS Platform

Currently, the platform has over 10,000 MSMEs registered. MSMEs will benefit from an increase in TReDS registrations because it will help them boost their liquidity collectively.

How does it work?

Banks and other financial institutions will compete to take over the supplier’s receivables (the MSME). Rather than reflecting the creditworthiness of the MSME, the interest rate will reflect the creditworthiness of the large corporation on whom the invoice is raised.

On a specific day and time, the settlement file reveals how much a financier must pay an MSME seller and how much a buyer owes the financier, ensuring credit discipline.

Learn more about – What Is Udyam Registration For MSME? Step-By-Step Process Of MSME Registration

Why should small firms register?

Factoring (where the supplier pays the interest) is still not popular in India because major corporations continue to abuse their stranglehold over small enterprises, delaying payment for months.

As a result, registration ensures that payments are made on time and that larger firms are not bullied.

What’s the greatest strategy to keep your working capital in check?

Registering your business is one of the finest methods to ensure that the government pays attention to your working capital needs. You can register for free on the new Udyam portal or TReDS! Over 6.3 million small businesses are still unregistered.

Aside from that, you must ensure that cash flow reserves are always kept in your bank account.

Watch our YouTube video for more info:

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