Introduction
2019 promises to be an exciting year from many prospective, of course, the most exciting would be watching how the political scenario plays out in the first half of the year and it is already building up to be a nail biting thriller!
We as a nation are also looking forward to become the 5th largest economy in the world in terms of nominal GDP, getting past United Kingdom. In terms of smart phone users we will cross the 350 million user milestone this year. Out of the top ten large economies of the world, though slightly down, our growth rate is still the highest at over 7%.
It is also great to see that we as a nation are now looking at the MSMEs more closely and recognising the potential and importance of this segment in terms of achieving inclusive growth.
Problem Statements
It is a known fact that out of the 63 million plus MSMEs in the country only about 10% have access to formal credit from Banks and NBFCs. Some of the estimates show a credit demand and supply gap of Rs. 19 lac crores for the MSME segment.
Considering the fact that 90% of the formal MSME funding today is from Banks and NBFCs we need to identify and address the pain points these two segments are facing in providing finance to the MSMEs.
Worldwide, factoring is an excellent way of financing working capital needs of the MSMEs.
Factor Chain International (FCI) reported a volume of EUR 2598 Billion in 2017 registering a growth of 9% over the 2016 numbers. While China tops the list by registering factoring volume of EUR 405 billion, UK occupies second place at EUR 324 billion.
Trade Receivable Discounting System (TReDS)
TReDS was introduced by RBI based on the report of the Raghuram Rajan Committee on Financial Sector Reforms in 2008.
TReDS is a payment system and operates under the Payment & Settlement Systems Act, 2007.
The three participants on the TReDS exchanges are Large Corporate Buyers/PSUs/Govt. Depts., MSME Sellers and Banks and NBFC Factors.
TReDS exchange offers factoring and reverse factoring options through a transparent and electronic bidding mechanism for discounting of receivables by the MSME sellers.
The sellers need not enter into bilateral agreements with the Financiers. They only have to execute a onetime documentation with the TReDS platform.
The discounting is without recourse to the MSME sellers and requires no collateral to be provided to the Financier.
TReDS thus provides the best possible rate to the MSMEs as financiers provide rates depending on the credit risk of the large corporate buyer and not that of the MSMEs.
In the past one and a half years of operations, Invoicemart discounted invoices worth more than INR 1,800 crores.
Road Ahead
Thus TReDS is one channel which I believe must be explored by all financiers as a new channel for MSME financing.
The Govt of India has now made it mandatory for all CPSEs and all companies having turnover of Rs. 500 crores and more to compulsorily register with TReDS platforms.
TReDS is an end to end digitized platform for receivable factoring and must be adopted by all business units and financiers as a preferred mode of working capital finance.
At present TReDS Model is buyer led. TReDS can become a real enabler for the MSMEs as a source of working capital finance and can help reduce the credit funding gap and make inclusive growth possible.
helpdesk@invoicemart.com