RBI weighs trade credit insurance for financiers on TReDS

The Reserve Bank of India is weighing the possibility of allowing financiers on the Trade Receivables Discounting System (TReDS) to take trade credit insurance (TCI).

This insurance cover can protect financiers-- Banks, Non-Banking Finance Companies- Factors, and other financial institutions -- on TReDS platform against the risk of default when they finance/discount trade receivables of Micro, Small and Medium Enterprises (MSMEs).

TCI, if allowed, can help financiers on TReDs to minimise bad debts and reduce provisions, thereby supporting their bottomline.

The current regulations do not allow financiers to take TCI as the expectation is that their financing activity should be solely based on their credit appraisal and not on insurance.

TCI is currently offered by general insurers to suppliers of goods and services against delay in payment or non-payment of trade credit.

TReDS is an electronic platform for facilitating the financing/discounting of trade receivables of MSMEs drawn against buyers (large corporates, public sector undertaking companies, and government departments) are financed by multiple financiers through a competitive auction process.

Three entities -- Receivables Exchange of India Ltd., A.TReDS, and Mynd Solutions -- have been operating TReDS for more than three years.

A senior public sector bank official said Banks’ have requested RBI to allow them TCI cover on TReDS platform initially in view of the rising stress in the MSME segment.

Moreover, this can buoy MSME financing activity, which is one of the priority areas for the Government as part of its Atmanirbhar Bharat Abhiyan (Self-Reliant India campaign), on the platform.

If the central bank allows TCI coverage to financiers on TReDS platform initially and it proves successful, this could be extended to other financing activities at a later stage, the Banker quoted opined.

According to RBI’s Report on Trend and Progress of Banking in India 2019-20, the number of MSMEs customers availing Covid-19 related moratorium increased to 78 per cent in August 2020, reflecting the stress in the sector.

As per RBI data on “Progress in MSME Financing through TReDS”, in FY2020, the number of invoices uploaded on TReDS platforms jumped 111 per cent year-on-year (yoy) to 5,30,077, with the amount involved rising 95 per cent yoy to ₹13,088.27 crore.

The number of invoices financed in the reporting year rose 106 per cent yoy to 4,77,969, with the amount involved rising 91 per cent yoy to ₹11,165.86 crore.

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