Trade Receivables e-Discounting System of India (TReDS) has been one of the most effective financial ecosystems in India’s recent financial history to facilitate the inclusion of MSME vendors in a mainstream financial arrangement, to help them unlock capital locked in unrealized receivables on account of goods and services supplied to industry majors and large corporates. That the three active Treds platforms have a registered MSME vendor count of around 40,000 vendors and have factored invoices aggregating to over Rs 150,000 crores since 2017 (approx. USD 20 bn) is a significant indicator of the success of TReDS.

TReDS is a digital marketplace where invoices representing credit sales are accepted by corporates- private sector/CPSEs and even Government Departments and financed by about 60 financiers ( PSU/Pvt Sector/MNC Banks; NBFCs Factor and other RBI approved NBFCs) who provide the vital liquidity and also participate on digital reverse auction of invoices to help MSMEs benefit from discovering a fair price for a collateral-free credit. In case the debtor ( being the large corporate) defaults on the due date, the financier on TReDS has no recourse to the MSME vendor for recovering their dues. In other words, financiers have been approving TReDS limits entirely on the creditworthiness of corporate debtors. Could anything else have been better for the MSME? The exponential growth of invoice factored volume on TReDS was possible under the the Factoring Regulation Act ,2011 framework, funds settlement gateway by NPCI and digital architecture provided by the TReDS platforms.

Despite the success of TReDS, the unmet credit gap to ensure the growth of MSMEs remains humungous. In their endeavour to expand the scope of TReDS, the Government has been taking policy measures from time to time to overcome impediments to deepen the impact of TReDS. One area has been to address the risk averseness of financiers in factoring invoices representing sales to debtors that are externally rated at or below investment grade. To address this Government has been encouraging Insurance Regulator to revisit guidelines for Trade Credit Insurance. This arrangement was summarily withdrawn in 2010 in the aftermath of the global credit crisis in 2008. Eventually, in Nov 2021, IRDAI approved providing trade credit insurance coverage by the General Insurers that covered commercial risks like insolvency or protracted defaults of the buyer. This opens up a huge market to the General Insurance Companies, estimated to be worth about Rs 20,000 cr, being a value of invoices outstanding on TReDS, that is waiting to be serviced.

In an effort to bridge this gap, the RBI announced in their policy to enlarge scope of TReDS, the participation by General Insurance Companies as the fourth stakeholder on TReDS. This is a very welcome development, and the market’s favour platform, M1xchange, in preparation for this expected policy change, is ready to launch online digital trade credit insurance for financiers on TReDS on July 1, 2023.

The insurers shall cover TReDS financiers for losses due to non-receipt of payment from a buyer for commercial or political risks, against the bills/invoices purchased or discounted on M1xchange, and it shall be issued for covering trade-related transactions. The insurance cover shall cover risks as per guidelines issued by IRDAI that, to the best of our knowledge would not currently cover Reverse Factoring transactions on TReDS.

In other related measures to expand the scope of TReDS, RBI shall also, on a case-by-case basis, issue Certificates of Registration for participating in TReDS as financiers to all types of entities that are permitted to undertake factoring transactions as per the Factoring Regulation Act,2011.

Additional Guidelines of RBI’s TReDS are mentioned in the list below. Let’s understand in brief.

The TReDS standards will be improved in the ways listed below based on experience and as stated in the statement of Developmental and Regulatory Policies from February 8, 2023, 

1. Trade Credit Insurance Facility now permitted on TReDS: With the Insurance companies being the fourth participants on TReDS, the following are the other ways which would help all the stakeholders in some ways:

• The MSME seller shall not be charged an insurance premium.
• The National Automated Clearing House (NACH) system, which is utilized to settle TReDS transactions, may be able to facilitate the collection of premiums and related activities.
• Upon receiving approval from lenders and insurance providers, TReDS platforms may enable the automated processing of insurance claims and establish deadlines for their resolution via the NACH system.

b) Expansion in the pool of financiers: Since TReDS transactions fall under the category of “factoring business”, banks, NBFC-Factors, and other financial institutions may currently take part as financiers in TReDS (as RBI permits it). Certain other businesses and institutions are permitted to conduct factoring operations under the Factoring Regulations Act 2011 (FRA). As a result, all organisations or institutions permitted to conduct factoring business under FRA and the rules and regulations adopted thereunder are now allowed to participated as financiers in TReDS. This would increase the number of financiers available on TReDS platforms.

c) Approval on secondary market of invoices factored on TReDS: According to TReDS rules, discounted/financed FUS are supposed to have a secondary market. However, this market has not yet been established. A secondary market for transfering FUS inside the same TReDS platform may be enabled at the discretion of TReDS platform operators based on the experience obtained. To be eligible for such transfers, the transferor and transferee must meet the requirements outlined in paragraph 3 of the RBI’s “Master Direction- Reserve Bank of India (Transfer of Loan Exposures) Directions. 2021’ dated September 24, 2021(as updated from time to time.

d) Non-Discounted FUs can be settled by TReDS: On average, 17% of FUS uploaded to TReDS platforms are not discounted or financed; for such FL-Js, TReDS guidelines mandate that purchasers pay MSME vendors outside the system. In order to reduce the difficulty for MSME sellers and buyers and to improve reconciliation, TReDS platform providers are now allowed to settle all FUS, whether they are funded, discounted, or otherwise, utilizing the NACH mechanism. The TReDS guidelines (under reference) and other pertinent laws, such as the Micro, Small and Medium Enterprises Development Act of 2006, will govern the timeline for funds settlement.

e) Competitiveness and Transparency: TReDS systems enable the financiers to bid in a transparent and competitive manner. The platforms may make the specifics of the bids field for a FU visible to other bidders in order to increase transparency; the name of the bidder, however, shall not be made public.

3. The ACT of Payment and Settlement Systems, 2007 (ACT 51 of 2007);s Section 10 (2) and Section 18 together allow for the insurance of this instruction.

For the first time, RBI has also approved the development of a Secondary Market of invoices factored on TReDS within the ambit of guidelines notified as per Master Direction-Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 issued on 24^th September, 2021. Under this enabler, a TReDS financier could offload their exposure on TReDS to a fellow participating financier, who may be interested in, say, for example, enhancing their PSL-qualified loan portfolio.

Interesting times are ahead as Trade Credit Insurance and Secondary Market for TReDS factored invoices both evolve.

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