TReDS RBI: Highlights and Participants of TReDS

What is TReDS?

TReDS is an institutional framework set up to promote the legitimately receivable funding of MSMEs by corporate purchasers through multiple financiers. MSMEs continue to face constraints in getting adequate funding, given their essential position in contributing to the Indian economy. Slow paying invoices are one major factor affecting the ability of MSMEs to turn trade receivables into liquid funds. In 2014, RBI introduced the concept of TReDS, a mechanism for the financing of trade receivables for MSMEs on a secure digital platform, to tackle the financing of MSMEs in India. Invoice discounting on TReDS involves three MSME Suppliers, Corporate Buyer, and Financier participants. Depending on the discounting method, the invoice is uploaded by either buyer or supplier and approved by the other party. Upon acceptance of the invoice, the financiers on the platform start bidding on the invoice.

What is M1xchange TReDS

The Reserve Bank of India granted Mynd Solutions Pvt Limited approval for the establishment and operation of M1xchange, India's first trade receivables exchange. M1xchange has digitally transformed the process of securing access to working capital for MSMEs by multiple financiers by invoice discounting. TReDS is a response to the MSMEs' eternal cash flow problems in India and an effective solution to drive the MSME sector into the next phase of the Indian economy. However, the value of TReDS is not limited to the MSME sector alone; it allows corporate buyers to purchase MSME supplier's products and services. Because the MSMEs are charged immediately via the authorised financiers, the companies enjoy an extended payment period. This also helps the company to better manage the cost of production with its MSME suppliers.

Highlights of TReDS

MSMEs have greater access to financing at reasonable rates without any additional collateral being offered. The funding is even without the MSMEs having recourse.

• Corporates save on the cost of procurement through improved financing term negotiation for their vendors. 

•  Financiers have the opportunity to build a portfolio of PSL assets on Trade Receivable Exchange platforms such as M1xchange.

TReDS: Scheme 

The scheme for developing and running the institutional framework to promote the financing of corporate and other buyers 'MSMEs' commercial receivables, including government departments and public sector undertakings (PSUs), through multiple financiers will be known as the Trade Receivables Discounting System. The TReDS would make all invoices as well as bills of exchange easier to discount. Furthermore, because the underlying entities are the same (MSMEs and corporate and other customers, including government departments and PSUs), the TReDS should manage both the factoring of receivables and the reverse factoring, so that higher quantities of transactions reach the network and encourage better pricing. The transactions processed under TReDS will be with the MSMEs "without recourse."

Who are the Participants in TReDS? 

• MSME sellers, corporate and other buyers, including the Government 

• Primary participants in the TReDS would be departments and PSUs, and financiers (both banks and NBFC factors). The TReDS will provide the forum for getting these participants together to promote the upload, acceptance, discounting, trading, and settlement of MSMEs' invoices/bills.

• To obtain information on the portfolio of discounted invoices/bills of the respective customers, sellers, and buyers bankers that be given access to the network where appropriate. TReDS can stay together 

• To provide its services with the appropriate technology providers, system integrators, and organizations offering dematerialization services.

Regulatory framework for TReDS 

The TReDS, which undertakes clearing and settlement activities, will be regulated by the regulatory structure established under the Payment and Settlement Systems Act 2007 (PSS Act) by the Reserve Bank of India. Under the PSS Act 2007, it will function as an authorized payment system. The TReDS 'activities, as well as those of the TReDS participants, would be governed by the relevant legal and regulatory provisions applicable to various system stakeholders. As such, the TReDS processes and procedures shall comply with certain legal and regulatory requirements that may be provided and amended by the respective authorities from time to time.

What is the Eligibility Criteria to set up TReDS 

 a) Financial Criteria 

• Since the TReDS can not take on any credit risk, its Minimum equity capital paid out shall be Rs. 25 crore 

• In the TReDS, international shareholding will be the same as in the current foreign investment strategy

• The promoters/entity seeking to establish the overall financial strength 

• TReDS would be an essential evaluation/selection criterion

b) Technological capability 

• To support its operations, the TReDS should have sound technical foundation. As such, the TReDS will satisfy the following technical specifications to the full

• TReDS should be able to provide all participants with an online forum

• Data about bills/invoices, discounts and quotes Disseminated in real-time via TReDS and supported by a robust MIS system

• The TReDS shall provide an effective Business Continuity Plan (BCP) with a platform for the recovery of disasters

• The TReDS shall have online tracking capabilities, Real-time locations, prices, and volumes to power system manipulation

• Trade Receivable Discounting System refers to TReDS. TReDS is being set up in compliance with the RBI Guideline released on 3 December 2014. TReDS is an online electronic platform and an institutional financing/factoring mechanism for MSME Sellers' trade receivables against Corporate Buyers, Govt. Departments and public utilities