TReDS platforms, first proposed by the Reserve Bank of India in 2015, are intended to help small businesses unlock their dues in time. Long delays in payments have plagued these businesses for years and added to the need for working capital.
Once the MSME seller delivers goods along with an invoice, they can create a bill or an invoice on the system. The bill or the invoice, called a factoring unit on TReDS, is consequently accepted by the buyer.
This factoring unit is then rated by TReDS. Some of the factors used for such a rating include:
External rating of the buyer of the goods.
Credit history of the buyer of the goods.
The nature of the underlying instrument.
Any previous instances of delays or defaults by the buyer in transactions on TReDS platforms.
Once rated, a financier applies a discount rate and gives the MSME its dues upfront while waiting for the buyer of goods to make good on the payment. What may have precipitated more activity on the platforms in the aftermath of the pandemic is simply lack of choice and increased awareness. MSMEs have easy access to the platform and many are now digital savvy, Sankaran said.
Word-of-mouth and outreach programmes may have also widened the reach, Mohindru said. While transactions on the platforms were earlier originating from about 300 cities, now they’re spread across more than 600 cities, he said.
While there were some instances of early defaults, there was no sharp spike during the pandemic. This, too, may have brought in more lenders to finance receivables.
TReDS hasn’t seen a rise in defaults, Shekhar Bhandari, president for global transaction banking at Kotak Mahindra Bank Ltd., said. Players have become efficient and all the players on the platform know when a buyer defaults and that works as a deterrent, he explained.
In fact, there has been a considerable drop in discount rates. For instance, some corporates whose invoices were attracting a discount rate of 7.5% last year, are now discounting at below 5%, according to Gaikwad. It’s a significant move, he said.
Rates are now highly competitive, ranging between 3.5-8% for highly rated PSUs and Navratnas, Sankaran said.
The pandemic has also encouraged financiers to be more competitive and manage their working capital more efficiently, Bhandari said. Additionally, financing on TReDS qualifies as priority sector loans, encouraging financiers to be more competitive.
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