The Indian economy heavily relies on the Micro, Small, and Medium Enterprises (MSME) sector, which contributes 30% to the nation’s GDP, 48% to total exports, and employs 40% of the country’s workforce. However, despite its significant role in socioeconomic development, MSMEs face challenges related to limited access to finance and working capital. This hinders their daily operations and prevents them from expanding globally. Resolving this issue requires providing timely financial assistance to MSMEs, regardless of their loan size, collateral availability, or credit score. Recognizing the importance of addressing this widespread problem, the Reserve Bank of India (RBI) introduced the Trade Receivables Discounting System (TReDS). Through the TReDS platform, registered MSMEs can obtain financing without any recourse against their invoices issued to registered buyers within a span of 24 hours.

The need for new measures

TReDS, an electronic platform for bill discounting, operates under the regulatory framework of the Reserve Bank of India (RBI). It is a collaborative effort between SIDBI and NSE, aimed at facilitating prompt payments to MSMEs for their outstanding trade receivables. The RBI has implemented various policies and initiatives in the past to ensure that a wider range of MSMEs can easily access funds.
The TReDS platform experienced a successful launch, witnessing significant growth in the discounting of invoices. Over time, the RBI has been actively strengthening the TReDS ecosystem and encouraging all participants to support small businesses by providing them with seamless access to working capital through the digital ecosystem. However, it was crucial to expand the scope of the TReDS platform to stimulate the market for MSME receivables.
To enhance liquidity, reach, and impact, the inclusion of NBFCs and insurance companies was necessary under the TReDS platform. This expansion aimed to further bolster the receivables market for MSMEs, ensuring a more robust and efficient system for their financial needs.

New policies

On February 8, 2023, an important development took place regarding TReDS, which was highlighted during the Governor’s Monetary Policy Committee (MPC) speech. The Reserve Bank of India (RBI) expanded the scope of TReDS and introduced several key features as follows:

  1. Inclusion of Insurance Companies: The TReDS platform will now allow insurance companies to become ‘fourth participants’ alongside MSME sellers, buyers, and financiers. This move aims to enhance the ecosystem and broaden the range of participants.
  2. Expansion of Financiers: The proposal entails the participation of all entities and institutions covered under the Factoring Regulation Act as financiers for conducting factoring operations on the TReDS platform. This inclusion aims to increase the number of financiers and provide more options for MSMEs.
  3. Introduction of Secondary Market Operations: TReDS will now facilitate secondary market operations, enabling financiers to transfer their invoice portfolios to other financiers on the platform. This feature enhances flexibility and liquidity within the system.
    The RBI’s decision to expand the TReDS platform and introduce these new features aims to promote a more inclusive and efficient ecosystem for invoice discounting. By allowing insurance companies to participate and involving a broader range of financiers, the platform becomes more robust and accommodating. The introduction of secondary market operations further enhances liquidity and flexibility for financiers on the TReDS platform.
A delight for MSMEs

The introduction of insurance companies as the fourth participant in the TReDS platform is a strategic decision aimed at expanding its scope and enhancing its reach. This new development will encourage financiers to allocate credit limits to buyers with lower credit ratings. As a result, a considerable number of MSMEs that cater to a diverse range of buyers will benefit. Additionally, the inclusion of secondary market operations will enable financiers to free up their capital and engage in continuous discounting on TReDS. This, in turn, will ensure that financiers have sufficient liquidity to support invoice discounting on the platform.
These new initiatives have a twofold objective. Firstly, they will facilitate MSMEs in accessing adequate working capital, enabling them to seamlessly access funds before receiving payments from their customers for goods and services. This timely access to liquidity will be instrumental in helping small businesses meet their financial needs. Secondly, it will empower businesses to plan and execute expansion and growth projects more effectively, as they will have easy and timely access to the necessary funds.
Overall, these advancements in the TReDS platform are expected to significantly benefit MSMEs by providing them with the necessary working capital, promoting seamless cash flow, and empowering them to pursue expansion and growth opportunities.

Bottom line

The TReDS platform has experienced a remarkable compound annual growth rate (CAGR) of over 100% in the past five years. Currently, the platform boasts a registered seller base of more than 45,000 MSMEs. The recent policies introduced by the Reserve Bank of India (RBI) have generated significant anticipation. These guidelines are set to facilitate the increased involvement of financiers in TReDS by allowing Trade Credit Insurance for a diverse range of buyers and enabling secondary market operations. Consequently, this will activate the existing financier portfolios and provide support in unlocking funds for continuous disbursements on the TReDS platform. The proposed RBI initiatives are expected to infuse liquidity into the MSME ecosystem.