RBI expands scope of TReDS platform to allow insurance facility, secondary market ops & to improve cashflow of MSMEs

The Reserve Bank of India decided to expand the scope of the Trade Receivable Discounting System or the TReDS platform allowing the use of insurance facilities, permitting entities eligible to undertake factoring business to participate as financiers on TReDS and allowing secondary market operations on the platform. The central bank’s decision is expected to boost trade of receivables increasing cash flows to MSMEs.

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Significance of The Expansion of TReDS Platform:

• According to experts wider participation by more entities can keep the receivable discounting pricing under check as the volume on these platforms increases. Also, flexibility to allow re-discounting by existing holders of such discounted receivables will aid liquidity of participants.
• Insurance coverage for the discounted receivables can also enhance the volumes and further reduce the pricing of such insured receivables, however the appetite of insurance companies to issue such coverage remains to be seen.
• The expansion of the scope of TREDs platform serves to enhance the formalization of the lending eco-system for MSMEs.
• Secondary market operations will allow financiers to offload their portfolio to other financiers, which would further enhance liquidity on the TREDs platform and, ultimately, for MSMEs.

What is Trade Receivables Discounting System (TReDS) platform:

TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).

TReDS is a payment system authorised under the Payment and Settlement Systems (PSS) Act, 2007. It is a platform for uploading, accepting, discounting, trading and settling invoices / bills of MSMEs and facilitating both receivables as well as payables factoring (reverse factoring). MSME sellers, corporate and other buyers, including Government Departments and PSUs, and financiers (banks, NBFC-Factors and other financial institutions, as permitted) are direct participants in the TReDS and all transactions processed under this system are ‘”without recourse” to MSMEs.