Trade Receivables Discounting System (TReDS)

Micro, Small and Medium Enterprises (MSMEs) play an important role in the economic fabric of the country. The sector had been facing constraints in obtaining adequate finance, particularly in terms of their ability to convert their trade receivables into liquid funds. To address this pan-India issue, setting up of and operating TReDS was conceptualised.

What is TReDS?

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).

TReDS is a payment system authorised under the PSS Act. It is a platform for uploading, accepting, discounting, trading and settling invoices / bills of MSMEs and facilitating both receivables as well as payables factoring (reverse factoring). MSME sellers, corporate and other buyers, including Government Departments and PSUs, and financiers (banks, NBFC-Factors and other financial institutions, as permitted) are direct participants in the TReDS and all transactions processed under this system are '"without recourse" to MSMEs.

Initially, three entities were authorised to operate TReDS. To encourage innovation and competition through increased participation, 'on-tap' authorisation was introduced in October 2019. New players would be authorised considering the merits of the proposal and assessment of potential for additional entities.

Who are the participants in TReDS?

Sellers, buyers and financiers are the participants on a TReDS platform.

Who can participate as a seller in TReDS?

Only MSMEs can participate as sellers in TReDS.

Who can participate as a buyer in TReDS?

Corporates, Government Departments, PSUs and any other entity can participate as buyers in TReDS.

Who can participate as a financier in TReDS?

Banks, NBFC - Factors and other financial institutions as permitted by the Reserve Bank of India (RBI), can participate as financiers in TReDS.

How does TReDS work?

Broadly, following steps take place during financing / discounting through TReDS:

• Creation of a Factoring Unit (FU) - standard nomenclature used in TReDS for invoice(s) or bill(s) of exchange - containing details of invoices / bills of exchange (evidencing sale of goods / services by the MSME sellers to the buyers) 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.

RBI has not made it compulsory for any buyer, seller or financier to participate in TReDS. The response has been tepid from the buyers' side. Reasons for their reluctance could range from internal processes, indifferent attitude towards payments to be made to MSMEs, balance sheet related compulsions, etc. In view of this, the Government has made it compulsory for certain segments of companies to mandatorily register as buyers on TReDS platform(s). The government directive, however, does not make it compulsory for these entities to perform transactions in TReDS.

 What is a Factoring Unit (FU)?

A Factoring Unit (FU) is a standard nomenclature used in TReDS for invoice(s) or bill(s) of exchange. Each FU represents a confirmed obligation of the corporates or other buyers, including Government Departments and PSUs.

Who can create an FU?

In TReDS, FU can be created either by the MSME seller or the buyer. If 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.

Whether TReDS could deal with reverse factoring?

Yes. The TReDS could deal with both receivables factoring as well as reverse factoring.

Whether the MSME seller would have to pay to the financier in case the buyer defaults in repayment?

No. The transactions processed under TReDS are “without recourse” to the MSMEs.

Whether any authorisation is required to set up and operate a TReDS platform?

Yes, authorisation is required to be obtained from RBI under the Payment and Settlement Systems (PSS) Act, 2007.

Source : RBI