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M1xchange in partnership with YES Bank and RBL Bank has announced that it has started testing the ‘Small-to-Small Factoring’ product under the Reserve Bank of India’s third cohort of the regulatory sandbox.
M1xchange is an online exchange (Trade Receivables Discounting System/TReDS) that facilitates financing/discounting of trade receivables of micro, small and medium enterprises (MSMEs) through banks/NBFCs.
This product is intended to enable early liquidity to MSME buyers and sellers, supported by an end-to-end digital process, the exchange said in a statement, adding the testing under the sandbox is expected to be complete by September 2022. Later, a full-scale roll-out of this product is expected to address the over $750 billion credit gap for MSMEs in India, M1xchange said.
‘A 360-degree view’
“One of the key features of this product is the digital credit assessment engine that enables a 360-degree view of the credit profile of the MSME buyer using a cash flow-based credit model,” said a statement.
“This model analyses authentic, non-repudiable data from multiple digital sources to generate rich insights around MSMEs credit profile and hence alleviates traditional concerns around the authenticity of MSMEs business financials, a key data source in traditional balance sheet based credit assessment model,” it added.
Sundeep Mohindru, CEO, M1xchange noted that in the current inflationary market, where the cost of raw materials has gone up multifold and stocks have to be purchased in advance to manage the supply chain disruption, MSMEs’ need for working capital (WC) is very high.
‘Traditional limits may fall short’
“The traditional overdraft/cash credit limits sanctioned on basis of MSME financials and the collateral they offer will fall short of WC needs. The cost of funding outside the banking system is very high for MSMEs,” he said.
Mohindru said with the ‘Small-Small Factoring’ product, MSMEs will be able to utilise TReDS for receivables discounting from their MSME buyers, who in turn will be able to procure at better prices and manage their inventory adequately.
In the prevalent TReDS model, most of the buyers are large, well-rated corporates with a turnover greater than ₹500 crore and a long-term credit rating better than ‘A-’
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