RBI Proposes to Expand TReDS Scope to Improve MSME Cash Flows

The Reserve Bank of India (RBI) Governor Shaktikanta Das stated in his monetary policy speech that the RBI plans to expand the acceptability and scope of the Trade Receivables Discounting System (TReDS) among stakeholders.

The RBI Governor stated that the RBI proposes to expand the TReDS scope by providing an insurance facility for invoice financing, permitting all institutions and entities undertaking factoring business to participate as financiers in TReDS and enabling rediscounting of invoices. 

TReDS is an electronic platform that enables many financiers to discount or finance Micro, Small and Medium Enterprise (MSME) trade receivables. Businesses and purchasers, such as government agencies and PSUs, may owe these receivables. The major participants in TReDS are buyers, sellers and financiers.

MSMEs often face a cash crunch as they do not have deep pockets. A payment delay from clients for the supply of goods and services, whether government or private, can significantly affect small businesses. Such situations force many MSMEs to refrain from lucrative projects with delayed payment cycles. MSMEs that could not manage the resource crunch had to cease operations, especially during Covid times.

The insurance facility proposed by the RBI will encourage discounting of payables of a buyer irrespective of its credit ratings. As per the RBI’s Monetary Policy Committee (MPC) report, insurance companies will be allowed to participate in TReDS as a fourth participant, apart from the MSME buyers, sellers and financiers.

The secondary market would allow financiers within the same TReDS platform to offload the existing portfolio to other financiers. All entities undertaking factoring business under the Factoring Regulation Act would be permitted to participate as financiers in TReDS.

Expanding the scope of the TReDS and providing an insurance facility for invoice financing will provide money for MSMEs involved in executing projects. It would help small businesses get cash easily to keep their business running while a client is yet to make payments for goods and services.

For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@clear.in