What is the Trade Receivables Discounting System (TReDS) platform?

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What is the Trade Receivables Discounting System (TReDS) platform? Blog Image

Overview:

The Reserve Bank of India (RBI) Governor recently said that the TReDS platform introduced in 2014 for MSMEs to finance or discount their invoices — finances around 35,000 factoring units (FUs) monthly.

About Trade Receivables Discounting System (TReDS) platform:

  • It 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).
  • Purpose: To allow MSME sellers to discount invoices raised against major corporations, which helps them manage their working capital demands. The platform enables MSMEs to receive payments more quickly.
  • Participants:
    • Sellers, buyers, and financiers are the participants on a TReDS platform.
    • Only MSMEs can participate as sellers in TReDS.
    • Corporates, Government Departments, PSUs, and any other entity can participate as buyers in TReDS.
    • Banks, NBFC - Factors, and other financial institutions, as permitted by the RBI, can participate as financiers in TReDS.
  • RBI has not made it compulsory for any buyer, seller, or financier to participate in TReDS. 
  • The Government has made it compulsory for certain segments of companies to mandatorily register as buyers on the TReDS platform(s). The government directive, however, does not make it compulsory for these entities to perform transactions in TReDS.
  • How does TReDS work?
    • Creation of a Factoring Unit (FU) - standard nomenclature used in TReDS for invoice(s) or bill(s) of exchange - containing details of invoices/bills of exchange.
    • Acceptance of the FU by the counterparty - buyer or the seller, as the case may be;
    • Bidding by financiers;
    • Selection of best bid by the seller or the buyer, as the case may be;
    • Payment made by the financier (of the selected bid) to the MSME seller at the agreed rate of financing/discounting;
    • Payment by the buyer to the financier on the due date.

What are Trade receivables?

  • Trade receivables are defined as the amount owed to a business by its customers following the sale of goods or services on credit.

 


Q1: What is a bill of exchange?

A bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date.

Source: 35,000 invoices worth Rs 7,200 crore financed on TReDS every month: RBI Governor Shaktikanta Das