The Trade Receivables Discounting System (TreDs), a bills discounting platform for MSMEs vendors, has shown some growth in the wake of the pandemic-induced crisis, but is still an under-performer in relation to the unmet credit needs of MSMEs. Under TreDs, which kicked off in 2017, invoices are placed on a ‘platform’ now provided by three recognised exchanges, with MSME sellers, large buyers and factoring agents (banks and NBFCs) as participants. The factoring agents bid for the bill after it is validated by a TreDs-recognised buyer, allowing the seller to opt for the best discounted price. The margins are shared by the factoring agent and the exchange, while the full amount is recovered from the buyer. Besides the seller being paid upfront, there is no recourse to him. This looks like a sound system in a scenario when MSMEs are plagued by delayed payments, despite legal protection — but it relies on all players being transparent and confident about the workings of the system. The value of transactions on the TreDs platform doubled in FY22 over the previous year to over ₹34,000 crore; it was just ₹11,165 crore in FY20, according to a Rajya Sabha question. Bills worth ₹69,000 crore have been discounted since the inception of TreDs in 2017. TreDs seems to have picked up in the wake of a drying up of informal sources of ‘trade credit’ in recent years. Yet, its performance is underwhelming when viewed against the overall MSME credit outstanding of about ₹17 lakh crore. TreDs’ biggest advantage is that it will give a fillip to the formalisation drive of the economy, by improving the database for both tax authorities and bankers. But for TreDs to pick up, both supply and demand-side bottlenecks need to be addressed.

On the supply side, public sector enterprises are reluctant to get on to the platform despite the Centre ‘instructing’ PSU entities of above ₹500 crore turnover to do so. The reasons for this reluctance are not clear, which gives rise to speculation on whether these entities are averse to transparent invoicing. A further push from the Centre is called for. Factoring agents (now banks and big NBFCs) cannot be increased without due regard for whether they meet RBI’s prudential requirements. However, for the vendors to be enthused by TreDs, it needs to offer better rates than existing sources of finance, and these include nimble fintech players who are able to cut through red tape. Besides, existing products such as ‘cash credit’ provide for not just receivables like TreDs does, but also for work in progress, raw material and inventory needs. A sense of familiarity with this typically hybrid Indian product keeps it going. That said, TreDs could complement existing bank offers.

Credit outreach to MSMEs does not reach the bottom of the pyramid, namely the micro and small enterprises, despite post-Covid efforts. Credit growth to medium enterprises in FY22 (turnover of ₹50- 250 crore) at over 30 per cent has outstripped that to micro and small enterprises (₹50 crore and below), which stands at about 10 per cent. This is despite the latter dominating the MSME universe. True formalisation will become a reality when credit products are structured to meet the needs of the small firms.

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