TReds – The New Paradigm in Supply Chain Finance

Introduction

In the union budget presented on 5th July 2019, it was proposed that all NBFCs (not only
NBCF-Factors) will be permitted to access the TReds platform and suitable amendments to
the Factoring Regulation Act 2011 will be made. This is a significant development for the
supply chain finance market.

Micro, Small and medium enterprises are more often than not suppliers of goods and
services to larger Corporates /PSUs. The payment terms to these smaller entities can vary
between 30 days to as high as 120 days even though the MSMED act mandates payments
to MSMEs within 45 days of invoicing/goods receipt.

These receivables (unpaid invoices of MSMEs) which are stuck lead to working capital
squeeze at these MSMEs and hamper their growth and development. In order to solve this
issue in a transparent and hassle free manner, the Reserve Bank of India , in 2014 launched
the Trade Receivables Discounting System (TReds) .Initially 3 corporate entities have been
licensed to build , operate and manage their own TReds platforms in India, regulated by RBI

This is a brief article to give an overview of the TReds platform

What is TReds ?

The Trade Receivable Discounting System (TReds), an online invoice discounting

platform that helps cash-starved MSMEs raise funds by selling their trade
receivables to corporate. The TReds platform enables discounting of invoices/bills of
exchange of MSME sellers against large corporates, including government departments
and public sector undertakings, through an auction mechanism to ensure prompt
realization of trade receivables at competitive market rates. Multiple financiers
participate in the auction. It addresses the twin issues facing MSMEs- prompt
encashment of receivables and elimination of credit risk.

How does the TReds platform work ?

There are 3 types of participants on TReds:

i) MSME Seller who supplies goods and raises invoices

ii) Corporate Buyer which purchases goods on credit terms from the MSMEs
iii) Lender who finances the transaction

The transaction on the TReds platform falls under the factoring product norms and act (I will
write a separate article on factoring later).Under the factoring act, the MSME sellers assign
the receivables to the lenders; it is akin to selling the receivables to a lender at a discount in
return for immediate payment. The discount is effectively the interest charged by the lender.
The MSMEs sell to the Corporates and generate invoices/bills of exchange in favor
of the corporate buyers. The MSME creates a ‘factoring unit’ on the TReds system
which is then further verified online by the corporate buyer through the available
invoices/bills of exchange against them. The factoring unit is nothing but a pool of
receivables which the MSME is opting to sell on the TReds platform. Factoring unit
can generally be of an entire bill/invoice amount or in multiples of pre-defined
face value. The factoring unit shall also mention the details of the buyer and the
seller, the due date, the issue date and the tenor etc.

Once these factoring units are available on the platform the financers registered
with the TReds platform place bids for their financing which is presented to the MSME
seller. Once the MSME seller accepts the bids, the financer receives information
pertaining to it. Thereafter the funds are credited to the account of the MSME
seller on the basis of T+2 settlement system. This process is deemed to be an
assignment of debt to the financer by the MSME seller and the corporate buyer is
entitled to pay the financer on the due date. TReds ensures sending due
notifications to corporate buyer before the due date.

Hence, the MSME is able to get paid immediately rather than wait for 30-120
days. The lender also is able to deploy funds where the transaction is
authenticated by TReds, basic due diligence of seller done and the counterparty
is generally a satisfactorily rated corporate /PSU (buyer).

The biggest advantage for MSMEs is that the financing is without recourse to
them. Approximately Rs 7000 crores have been financed during FY 2018-19 vide
the three existing TReds platforms. These three platforms are run by Mynd
Solutions limited, SIDBI and Axis bank respectively along with their partners.

Key take away: The present volumes are likely to grow manifold in the next few
years and the budget announcement will give it a further fillip. TReds is emerging
as the new face of supply chain finance in India. A lot of action expected ahead.