Editorial

TreD push

| Updated on January 17, 2021

Trade Receivables and Discounting System players could do with trade credit insurance

The Trade Receivables and Discounting System (TreDs), begun in 2014, has not really taken off. A platform that essentially discounts the bills receivable of a supplier and recovers the sum from the buyer at a later date, this facility was meant to work as a game changer for MSMEs that are plagued by delayed payments from large buyers, which disrupts their working capital cycle. However, going by the estimates of the UK Sinha committee on MSMEs, TreDs is processing barely one per cent of the unmet credit needs of the MSME sector (about ₹20 lakh crore); the platform handles a turnover of less than ₹15,000 crore from about 5.5 lakh invoices. TreDs as a factoring and discounting facility assumes a crucial role at a time when the economy is emerging from the throes of Covid, with MSMEs facing liquidity and solvency concerns. Despite the MSMED Act, 2006, mandating clearing of dues in 45 days, the laws are observed more in the breach by large buyers, including government agencies which are supposed to procure 25 per cent of their requirements from MSMEs. While large units too are under pressure these days, their reluctance to enrol on the TreDs platform, despite the fact that units with a turnover of ₹500 crore are required to register themselves, is unfortunate. It is in a situation of low business confidence that TreDs financiers need a back-up in the form of trade credit insurance, as suggested by the Reserve Bank of India.

For MSMEs, factoring platforms such as TreDs assume importance in the wake of an apparent drying up of informal sources of credit. With formal sources being risk averse and geared to addressing the liquidity needs of established players with sound collateral and documented cash flows, MSME start-ups have few credit windows to turn to. While the MUDRA window offers small ticket loans, the NBFC sector (a new entrant into the TreDS platform following moves to this effect in Budget 2020-21) remains retail-loan driven with limited factoring experience.

For factoring services to improve, the TreDs platform must initiate reverse factoring services, as suggested by the Sinha panel. This implies the buyer initiating the factoring process in order to ensure certainty of supplies. The Budget can consider giving a boost to reverse factoring, thereby enlisting the participation of large buyers in the TreDs platform. TreDs can also serve as a crucial cog in creating a real time 360 degree data base encompassing GST, direct taxes and IBC petitions. This will result in efficient financing of business as well as improved tax compliance. TreDs can curtail the length of the gross working capital cycle (estimated at over 300 days for MSMEs, according to the panel report) and help in NPA reduction. A push to TreDs cannot come too soon.

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Published on January 17, 2021
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