Improve the flow of working capital for MSMEs with TReDS

Sundeep Mohindru, Founder & CEO, M1Xchange in conversation with DQWeek, explains TReDS and the role it plays in making the economy better.

1. Simplify TReDS.

TReDS – Trade Receivable Discounting system is set up under the aegis of RBI, to improve the flow of working capital for micro, small and medium enterprises (MSMEs), at very competitive interest rates to and by reducing the receivables realization cycles. Bills raised by MSMEs are submitted digitally on TReDS platform and approved by large corporates digitally. Banks or financiers bid for discounting the invoices based on the risk rating of large corporates. MSMEs will receive their dues from the banks or financiers without waiting for the credit period agreed with large corporates.

The shortening of payment cycle and the smooth flow of liquidity through the platform will ensure that MSMEs do not lose out on business opportunities due to the shortage of funds. The cost of funds will be reduced for MSMEs’ as banks will be bidding basis the risk rating of a corporate.Banks will also benefit from the platform as the cost of acquisition and servicing the business will reduce substantially. Further, the MSME funding platform will qualify for Priority Sector Lending (PSL) criteria, thereby enhancing the compliance for the banks.

TReDS being a digital platform enhances the speed of making available the finance to MSME on all India basis, and the decision making by the financier is simplified as the transaction between buyer and Supplier is transparently reflected on the platform.

2. What led to the creation of this platform for payments?

In the Union Budget for 2015-16, the Honourable Union Finance Minister had highlighted the need for and use of TReDS for improving the flow of funds to MSME sector by reducing the receivables realisation cycles. TReDS is an institutional mechanism set up in order to facilitate the financing of trade receivables of MSMEs from corporate buyers through multiple financiers.

The need of TReDS platform aroused as MSMEs, despite their important role in the Indian economy, continue to face constraints in obtaining adequate finance, particularly in their ability to convert trade receivables into liquid funds. TReDS will allow SMEs to post their receivables on the system and get them financed.

3. How TReDS makes the economy better? Throw some light on it.

Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. MSMEs not only play a crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in the industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth.

The Sector consisting of 36 million units, as of today, provides employment to over 80 million persons. The Sector through more than 6,000 products contributes about 8% to GDP besides 45% to the total manufacturing output and 40% of the exports from the country. The MSME sector has the potential to spread industrial growth across the country and can be a major partner in the process of inclusive growth.

To facilitate the growth of MSME, availability of working capital finance on time and at a reasonable cost is the objective RBI has achieved by enabling the set-up of an automated portal called TReDS. SMEs are able to get funding without any collateral, without any paperwork in shortest time. This platform actually comes as a solution for delayed payments. An MSME can scale up his business with the ease of financing on the platform.

4. Do you plan to launch another platform to further ease the process of payments?

We plan to enhance the existing platform to make it more comprehensive and intelligent in its service offering and ease the process of payments. All the aspects of payment process will be covered end to end on this platform.

5. Your take on completing the first TReDS transaction with IndusInd Bank.

Mynd Solutions’ TReDS platform, “M1Xchange” announced its first successful online invoice discounting transaction on 9^th May 2017. M1 Exchange had gone live for the customers (MSME sellers, corporate buyers and financiers) from April 7, 2017. The transaction worth Rs. 91 Lakhs was discounted on the Exchange by IndusInd Bank for a supplier of a large electronics company. The entire process of hosting the invoice by the vendor (MSME) on the M1Xchange platform, its acceptance by the Corporate Buyer, bidding and financing by the bank was completed in 48 hours. It marks the beginning of easy inflow of working capital to MSME vendors in the country, further enhancing the business engagement between the Corporates and the vendors.

6. Do you further plan to associate with other banks in similar contexts?

We have been consistently onboarding banks to participate on the platform. Currently, all prominent private banks, MNC banks and PSU banks are participating on the platform and there is ample liquidity for the financing of receivables.

Financiers are a vital part of TReDS, who have the task of bidding on Factoring Units (which have Invoices or ‘Bill of Exchange’ as underlying instruments) that have been uploaded by the supplier and approved by the buyer. The financiers bid on the ‘factoring units’, giving suppliers a choice to select the most favourable bid to receive funds.

With M1Xchange acting as the trade receivables service provider, Financiers get the opportunity to get quality assets in the MSME space across a wide geography in minimal time, cost and effort. Financiers can also bank on this Mynd’sTReDS platform since it allows them to participate in an evolving market scenario that's increasingly being driven by new Financial Technology initiatives and solutions.