Trade Receivables Discounting System (TreDs)

Trade Receivables Discounting System (TreDs)

Subject: Economy

Section : External Sector

Why in the news?

The Trade Receivables Discounting System (TreDs), a bills discounting platform for MSMEs vendors, has shown some growth in the wake of the pandemic-induced crisis, but is still an under-performer in relation to the unmet credit needs of MSMEs.

Trade Receivables Discounting System (TreDs):

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.

Who can participate as a seller in TReDS?

Only MSMEs can participate as sellers in TReDS.

Who can participate as a buyer in TReDS?

Corporates, Government Departments, PSUs and any other entity can participate as buyers in TReDS.

Who can participate as a financier in TReDS?

Banks, NBFC – Factors and other financial institutions as permitted by the Reserve Bank of India (RBI), can participate as financiers in TReDS.

Broadly, following steps take place during financing / discounting through TReDS:

• 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 (evidencing sale of goods / services by the MSME sellers to the buyers) on TReDS platform by the MSME seller (in case of factoring) or the buyer (in case of reverse factoring);
• 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.