RBI enhances scope of TReDs: How it will impact the MSME businesses?
The Economic Times
In a significant development for the MSME businesses, RBI permits all entities/institutions undertaking factoring business to participate as financiers, facilitate discounting of invoices for MSMEs from corporate buyers through multiple financiers under TReDS. Here’s are the details:
RBI GovernorShaktikanta Das has announced the expansion of the scope of Trade Receivables Discounting System (TReDs) on Wednesday at Monetary Policy Committee announcement.
Under the expansion provided by the RBI, insurance facility will be provided for invoice financing. It wil also permit rediscounting of invoices, that is, developing a secondary market in TReDS.
The apex bank has also decided to permit all entities/institutions undertaking factoring business to participate as financiers in TReDS.
While announcing these decisions, RBI governor Shaktikanta Das said these measures are expected to improve the cash flows of the MSMEs.
What is the TReDs and how it helps MSMEs
The Reserve Bank had introduced a framework in 2014 to facilitate financing of their trade receivables through TReDs.
TReDS is an institutional mechanism set up to facilitate discounting of invoices for MSMEs from corporate buyers through multiple financiers.
Under this mechanism, invoice discounting involves three participants: MSME Supplier, Corporate Buyer and Financier.
After RBI’s announcement on Wednesday, all entities/institutions undertaking factoring business can also participate as financiers in TReDS.
The invoice is uploaded by either buyer or supplier depending on the method of discounting. This is then approved by the other party after which the financiers on the platform start to bid on the invoice.
With the proposal of insurance facility for invoice financing, a security will be provided to the businesses. The rediscounting of invoices will help in developing a secondary market in TReDS.
The supplier accepts the bid and the discounted amount is credited in its account in Day of acceptance+1 day.
The key benefits of TReDS for MSME businesses are: easy access to fund, no paper work, single platform for sellers, buyers and financers, transact online, competitive discount rates, seamless data flow, and standardized practices.
