After the Reserve Bank of India (RBI) permitted insurance companies to come onto TReDS (Trade Receivables Discounting System) platforms earlier this month, players have begun discussions with insurers. However, they anticipate a gradual take-off.

TReDS platforms have largely been approached by 2-3 general insurance companies that have received the Insurance Regulatory and Development Authority of India (IRDAI)’s approval for their credit insurance product and are now looking to integrate their product with the platforms, industry players said.

Discussions with insurers

“We are in talks with insurance companies. The initial interest is limited but 2-3 insurers have come forward, and we expect that once they start operations, we will see more interest,” said Prakash Sankaran, MD and CEO, Invoicemart.

However, back-end technology integration, digital upgradation for both TReDS and insurers, caution on the part of insurers and financiers, and development of NACH (National Automated Clearing House) capabilities for debit and credit for insurance companies, are ensuring that the roll-out is slow and being done through pilot projects or a sandbox approach.

“Globally, it is a big market with 30-40 per cent trade finance being backed by insurance. In India, it will take some time to develop this market,” said Ketan Gaikwad, MD and CEO of Receivables Exchange of India Limited (RXIL).

Developing the market

As they get accustomed to the ecosystem, insurers might initially look to cover higher-rated corporates to ensure profitability and security. However, they are expected to focus on lower-rated corporates, which have a greater need for guarantees, as financiers typically do not demand insurance against good corporates.

“So far banks have been discounting invoices mostly for ‘A-’ and above-rated customers. Lower-rated corporates were not getting credit sanctions and their vendor bills could not be discounted. Insurers will bring liquidity on the platform because now the risk can be shared by them,” said Sundeep Mohindru, MD and CEO, M1xchange.

The insurance cover will rely on the risk that the insurers are willing to take on a corporate, irrespective of the size of the SME (small and medium-sized enterprises) and their receivables, Mohindru said, adding that all SMEs supplying to that particular corporate will benefit from the insurance cover.

Typically, about 60 per cent of the financing on TReDS is allocated to micro and small enterprises with a turnover of less than ₹50 crore, whereas 40 per cent is allocated to medium-sized entities with a ₹50-250 crore turnover.

Insurance cover

“The ticket size is from ₹10 to ₹5,000 crore. We expect the insurance cover to be around 80-85 per cent, based on how insurance companies underwrite the corporates,” Sankaran said. He added that another important aspect will be the risk premium as it may play a role in determining how attractive the credit insurance product becomes.

Default rates and risk management

While currently, the default rate on TReDS is minimal, opening up the universe to lower-rated corporates through an insurance cover is expected to increase the overall risk profile, leading to caution on the part of insurers, experts said.

Over the last 5 years, TReDS has financed over ₹1.6 lakh crore of which payments of 400-450 crore are in default. Of this, ₹250-300 crore pertains to a single large corporate, the Future Group, barring which the defaults are estimated to be around ₹150-180 crore - a default rate of about 0.1 per cent.

RXIL, which was the first TReDS platform to launch a sandbox for trade credit insurance on the platform in November 2020, expects to see insurance cover for about 10 per cent of the current volumes.

“We are currently doing volumes to the tune of ₹3,200 crore per month. To start with, we see insurance cover for about 10 per cent of the invoices or ₹400-500 crore per month by the end of FY24,” Gaikwad said, adding that off-take will be slow as insurers go through payment cycles for the test cases to assess the functionality of TReDS and the success rate in term defaults.

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