A Complete Guide to Trade Receivables Discounting System (TReDS): Everything You Need to Know

Understanding the financial landscape can be challenging especially for Micro Small and Medium Enterprises MSMEs facing cash flow constraints due to delayed payments The Trade Receivables Discounting System TReDS emerges as a pivotal solution offering a digital platform to streamline the financing of trade receivables This comprehensive guide delves into the intricacies of TReDS elucidating its mechanisms benefits compliance requirements and recent developments to provide a clear understanding for both newcomers and seasoned professionals

Understanding the Trade Receivables Discounting System TReDS

TReDS is an electronic platform designed to facilitate the financing and discounting of trade receivables for MSMEs through multiple financiers These receivables can be due from corporates government departments and public sector undertakings PSUs The primary objective of TReDS is to address the liquidity challenges faced by MSMEs by ensuring timely payments and improving their working capital cycles

How Does TReDS Work?

The TReDS platform operates through a structured process involving key participants MSME sellers buyers corporates government departments PSUs and financiers banks NBFCs

The workflow Includes:

• Creation of a Factoring Unit (FU): An FU representing an invoice or bill of exchange is created on the TReDS platform by the MSME seller or the buyer
• Acceptance of the FU: The counterparty buyer or seller accepts the FU confirming the trade receivables authenticity
• Bidding by Financiers: Financiers bid against the FU offering discount rates for financing
• Selection of Bid: The seller or buyer selects the most favorable bid
• Payment to MSME Seller: The selected financier disburses the discounted amount to the MSME seller
• Repayment by Buyer: On the due date the buyer repays the financier the full invoice amount

This seamless process ensures MSMEs receive prompt payments enhancing their liquidity

Benefits of Using TReDS For MSMEs

For MSMEs: 

• Improved Cash Flow: Quick access to funds by converting receivables into immediate cash
• Reduced Credit Risk: Financing is based on the buyers credit profile minimizing the MSMEs risk
• Competitive Financing Rates: Transparent bidding ensures access to favorable discount rates For Buyers

For Buyers:

• Streamlined Payment Processes: Efficient management of payables and improved supplier relationships
• Enhanced Negotiation Power: Potential for better terms with suppliers due to timely payments For Financiers

For Financiers:

• Access to a New Asset Class: Opportunity to finance trade receivables with reduced risk
• Diversification: Broadening of the financing portfolio with MSME receivables

Overall TReDS fosters a healthier financial ecosystem by ensuring timely payments and reducing dependency on traditional financing methods

Compliance Requirements for TReDS

As per recent directives the following entities are mandated to comply:

• Companies: All companies registered under the Companies Act 2013 with an annual turnover exceeding 250 crores
• Central Public Sector Enterprises CPSEs: All CPSEs regardless of turnover

These entities are required to onboard themselves onto the TReDS platform to facilitate prompt payments to MSMEs

What is Required for Compliance

The specified entities must

• Onboard onto TReDS Platforms: Register and integrate their systems with any of the RBI approved TReDS platforms
• Facilitate Transactions: Ensure that their payables to MSMEs are processed through the TReDS platform enabling efficient discounting and timely payments

This integration aims to streamline the payment process and enhance transparency in transactions with MSMEs

Deadline for TReDS Compliance

The Reserve Bank of India has set a compliance deadline

• Deadline: Entities must complete the onboarding process by March 31 2025

Adhering to this timeline is crucial to avoid regulatory penalties and to support the financial health of MSMEs

Recent Developments in TReDS

The Reserve Bank of India RBI has been proactive in expanding the scope of TReDS to enhance its effectiveness Recent guidelines aim to:

• Facilitate Insurance for Transactions: Insurance companies are now permitted to participate as a fourth participant in TReDS aiding financiers in hedging default risks.
• Broaden Participation: All entities allowed to undertake factoring business under the Factoring Regulation Act are now permitted to participate as financiers in TReDS augmenting the availability of financiers on the platforms
• Enable Secondary Market for Factoring Units (FUs): TReDS platform operators may now enable a secondary market for the transfer of FUs within the same platform subject to applicable regulations
• Settlement of FUs Not Discounted Financed: TReDS platforms are now permitted to undertake settlement of all FUsfinanceddiscounted or otherwiseusing the NACH mechanism improving convenience for MSME participants

Conclusion

TReDS stands as a transformative platform in the Indian financial landscape addressing the critical issue of delayed payments for MSMEs By facilitating the prompt discounting of trade receivables it ensures improved liquidity and operational efficiency for small enterprises As the platform evolves with regulatory support and increased participation it promises to be an indispensable tool for MSMEs striving for growth and sustainability

We invite you to share your experiences with TReDS in the comments below Are you an MSME or part of a corporate entity navigating this system Let us know how TReDS has impacted your operations For more insights explore our related articles on MSME financing solutions and stay updated on the latest developments in financial platforms like TReDS.

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