Operators of Trade Receivables Discounting System (TReDS) platforms applaud the Reserve Bank of India’s instruction to simplify Ministry of Micro, Small & Medium Enterprises (MSME) invoice discounting and increase liquidity

In a notification, the Reserve Bank of India RBI mentioned that the credit rating of the buyers is taken into consideration as financiers submit their bids on the Trade Receivables Discounting System (TReDS) platforms. They typically do not want to bid on payables from buyers with low ratings. An insurance option is being made available for TReDS transactions to help financiers manage default risks because of this.

Currently, based on the buyer's grade, financiers like banks, Non-Banking Financial Companies (NBFCs), and others place discounted bids on the invoice. Typically, lenders will only extend loans to borrowers with credit ratings of AA or AAA or higher and will avoid doing business with those whose scores are below BBB.

The Managing Director (MD) and Chief Executive Officer (CEO), Receivables Exchange of India Limited (RXIL), Mr. Ketan Gaikwad mentioned that this is where the need of insurance companies will emerge and after their due diligence about the buyer and the industry they are in, will provide the coverage.

The decision by the RBI creates a significant market potential for insurance businesses in trade credit insurance, claims Chief Executive Officer (CEO) M1xchange, Mr. Sundeep Mohindru. Additionally, insurance businesses do not need to set up their sales organisation to generate revenue out of it because a rising number of buyers and sellers are using TReDS platforms for invoice discounting.

As a result, they naturally attract business, which significantly lowers the cost of doing business. Additionally, insurance firms can determine the repayment behaviour of customers and base their risk assessment on that information thanks to the abundance of data patterns that have been collected over time on TReDS: Mr. Sundeep Mohindru.

Insurance providers are prohibited from charging the MSME seller for the cost of insurance. Additionally, the premium can be collected using the TReDS transaction settlement mechanism, the National Automated Clearing House (NACH). The central bank said that, with the approval of financiers and insurance companies, TReDS platforms will also be able to support the automated processing of insurance claims and prescribe deadlines for their settlement via the NACH system.

Since TReDS is a payment system as defined by the Payment and Settlement Systems Act of 2007, the movement of capital need not take place elsewhere. The RBI further mentioned that all entities eligible to do factoring business under the Factoring Regulation Act will be permitted to participate as financiers on TReDS as TReDS transactions fall under the ambit of factoring business.

Mr. Ketan Gaikwad stated that the Factoring Regulation (Amendment) Bill passed by the Parliament in 2021 was expected to encourage more financiers to join TReDS and the latest decision by RBI seeks to further push participation of financiers. To increase liquidity on a certain TReDS platform, the central bank also permitted secondary market transactions on TReDS for the transfer of invoices or factoring units (FUs).

This is because a financier need not wait so long to receive their money if a financial institution, like a Non-Banking Financial Corporations (NBFCs) or a factoring business, has discounted invoices with a 60-day or 90-day cycle. They can sell the invoice to a bank that may need to satisfy its priority sector lending (PSL) targets as part of secondary market activities, and that bank can then use the money to redeploy it; Mr. Sundeep Mohindru.

On TReDS systems, 17% of uploaded bills are often unfinanced. According to TReDS regulations, buyers must pay MSME sellers for such invoices outside of the TReDS system, according to RBI. The central bank permitted TReDS platform providers to handle the settlement of all bills utilising the NACH method on the platform itself, nevertheless, with the most recent change to the rules. To increase openness in the bidding process, the RBI further instructed TReDS platforms to show information on bids by financiers for an invoice to other bidders on the platform as well.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.