The Reserve Bank of India (RBI) has taken a significant step to enhance the trade receivables discounting system (TReDS) by allowing insurance companies to participate as stakeholders. This move is aimed at improving the cash flows of Micro, Small, and Medium Enterprises (MSMEs) and promoting transparency and competitiveness in the financing of trade receivables.
Introduction of TReDS : The RBI issued guidelines on TReDS in December 2014 with the objective of facilitating the financing of trade receivables of MSMEs. Subsequently, three entities started operating TReDS platforms. These entities process about Rs 60,000 crore worth of transactions annually.
Expanding the Platform : Building on the experience gained, the RBI has decided to expand the scope of the TReDS platform. In addition to MSME sellers, buyers, and financiers, insurance companies are now permitted to participate as the “fourth participant” in TReDS, according to a circular issued by the RBI.
Enhancing Financiers’ Confidence : Financiers place their bids on the TReDS platforms keeping in view the credit rating of buyers. They are generally not inclined to bid for payables of low-rated buyers. However, they are often reluctant to bid for payables from low-rated buyers due to default risks. To address this concern, the RBI has allowed an insurance facility for TReDS transactions. This insurance facility will enable financiers to hedge default risks and boost their confidence in participating in TReDS.
Insurance Facility and Rules : The TReDS platform operators have the authority to determine the stage at which the insurance facility can be availed, as stated by the RBI. It is important to note that the premium for insurance will not be charged to the MSME sellers, ensuring that the burden does not fall on them.
Expanding the Pool of Financiers : TReDS transactions fall under the ambit of factoring business. Initially, banks, NBFC-Factors, and other financial institutions were permitted to participate as financiers in TReDS. However, the Factoring Regulation Act, 2011 (FRA) allows certain other entities and institutions to undertake factoring transactions. To align with the FRA, the RBI has expanded the pool of financiers by permitting all entities/institutions allowed to undertake factoring business under the FRA and its associated rules and regulations to participate in TReDS. This broader participation will increase the availability of financiers on TReDS platforms.
Promoting Transparency and Competition : TReDS platforms play a vital role in facilitating transparent and competitive bidding by financiers. With the inclusion of insurance companies as participants, the RBI’s expansion of the TReDS platform aims to create a more robust ecosystem for trade receivables financing. By providing insurance facilities and broadening the pool of financiers, the RBI intends to support MSMEs by improving their cash flows and reducing default risks.
Key Points about Trade Receivables Discounting System (TReDS) :
* Trade Receivables Discounting System (TReDS) is a platform introduced by the Reserve Bank of India (RBI) to facilitate the financing of trade receivables of Micro, Small, and Medium Enterprises (MSMEs).
* TReDS platforms aim to improve the cash flows of MSMEs by allowing them to access funds against their trade receivables in a transparent and competitive manner.
* The RBI issued guidelines for TReDS in December 2014, and since then, three entities have been operating TReDS platforms in India.
* TReDS platforms process a substantial volume of transactions, with an estimated annual worth of approximately Rs 60,000 crore.
* The RBI has expanded the scope of TReDS by allowing insurance companies to participate as stakeholders. They are now considered the “fourth participant” alongside MSME sellers, buyers, and financiers.
* Financiers participating in TReDS platforms evaluate bids based on the credit rating of buyers. To address concerns about default risks, the RBI has permitted an insurance facility for TReDS transactions. This facility enables financiers to hedge against default risks, increasing their confidence in participating in TReDS..
Source : Economic Times