Synopsis–TReDS was supposed to be a game changer-a platform that could sort out the issue of delayed payments for MSMEs. Almost five years later, the achievements may have fallen short.
If fundraising has been a perennial problem for the country’s small business, the other serious issue is related to delayed payments. The problem was so acute that MSME Minister Nitin Gadkari pegged the outstanding payments to MSMEs by government agencies, public sector undertakings, and major industries at an estimated Rs 5 lakh crore last year.
For the financially starved MSMEs, unpaid dues are a serious strain on their working capital. This is despite the fact that in December 2016, the Reserve Bank of India gave approval to set up the first platform that could allow MSMEs, “to convert their trade receivables into liquid funds.”
Called the Trade Receivable Discounting System (TReDS), the platform was meant to resolve the issues of outstanding dues by facilitating the financing of trade receivables of MSMEs from corporate and other buyers, including government departments and Public Sector Undertakings (PSUs), through multiple financiers payments. The financing happens through discounting of both invoices and bills of exchange.
However, despite being around for a number of years, the performance of the platform seems to have fallen short of its intended objectives.
To be fair to the Government, it has tried to address the issue through various means. The Ministry of MSME has also set up a portal called MSME Samadhaan to tackle delayed payments. As on January 28, 2021, about 43,245 applications are pending related to unpaid dues and amounting to Rs13,797.76 crore. This is, however, a fraction of the total unpaid dues, since many MSMEs hesitate to approach the Government out of fear of spoiling their chance of again doing business with the creditor. And then there are ones that simply do not know the existence of the portal.
It would then make perfect sense to get on TReDS and sort out the problem of being unpaid. That is not happening for several reasons.
The figures
The problem for TReDS starts with the insignificant number of MSMEs, corporates and government undertaking, present on the platform and the platform’s popularity remains low.
To encourage more stakeholders to join the platform, Prakash Sankaran, MD and CEO, A. TReDS Ltd, one of the three licensees of the platform, suggest incentives through benefits to corporates and CPSEs/PSUs doing incremental payments through TReDS. The government should also modify the guidelines to ensure incremental liquidity on the platforms, he adds. Asked if the low participation by the Financial Institutions (FIs)/NBFC sector is the major impediment to the platform’s growth, he stresses that larger participation by MSMEs, corporates, CPSEs and PSUs needs to be ensured in the future.
Prakash Sankaran, MD and CEO, A. TReDS LtdHighlighting that in her last budget speech, the Finance Minister made an announcement regarding NBFC participation on TReDS platform as financiers, Sankaran stressed that the amendments to the Factoring Act 2011, allowing NBFCs to on-board on the TReDS platform “are still awaited”. If implemented, it would ensure a larger pool of financiers, he says.
He adds that lower rated businesses take funds from NBFCs and NBFCs are equally comfortable in lending funds to them and thus, allowing NBFCs on TReDS will help in furthering the objective of financial inclusion. “It will also encourage Small Finance Banks to get on board TReDS and participate in discounting, which currently is not happening as their cost of funds is high and they are outbid by the larger banks. In the long term, a stable repayment history of these lower rated businesses would encourage the bigger banks to discount invoices drawn on them by MSMEs,” Sankaran adds.
Ketan Gaikwad, CEO and MD, Receivables Exchange of India Ltd (RXIL), another licensee of the platform, opines that TReDS has so far processed over 26,000 crores worth of invoices, and holds the potential to achieve much more. In the ensuing budget, Gaikwad expects the amendments to Factoring Act to be passed and NBFCs other than NBFC factors to be allowed as financiers on TReDS. Such measures would open up TReDS to a vast number of MSMEs on whose lower rated buyers, the legacy financiers, were not comfortable placing bids, he underlines.
“Another important change we are counting on is the time bound integration of e-invoicing and GST,” he says, adding he hopes that the government would continue to reach out to vast majority of MSMEs which cannot access the platform whether due to the lack of adequate KYC, non-compliance of the corporate buyer or lack of awareness. He further maintains that TReDS should be taken up as a national mission to end the financial exclusion of MSME.
It’s cheap
There are ample benefits that TReDS offer to MSMEs. With TReDS, liquidity-starved MSMEs not only can raise funds by selling trade receivables to corporates but also get access to collateral free finance at much cheaper rates compared to banks. Besides that, the platform comes with ‘no recourse to MSMEs’ meaning obligation to repay the financiers remains with the corporate buyer. Hiral Madhav Valia, CEO of The East India Drums & Barrels Manufacturing Co. is a firm believer of the virtues of TReDS. She asserts that before TreDS came into being, there were no timely payments to MSME vendors supplying to corporates, including PSU companies.
“Now after registering with TReDS, an MSME supplier after uploading invoices can get their payment within 3 days. The discounting rate is also very cheap, say 4.5-5%. East India is registered with RXIL as a seller and our bills are being discounted at a cheap rate of 4.5-5%, which is much cheaper than the bank rates, at around 10.40%,” she says.
Hiral Madhav Valia, CEO, The East India Drums & Barrels Manufacturing Co.To help TReDS become the instrument of choice for MSMEs, the government has taken certain concrete steps. To facilitate their free onboarding on the platform, SIDBI’s “The Swavalamban Crisis Responsive Fund” (SCRF) was set up in June 2020. The industry is of the view that a continuous push towards financial literacy along with resolving existing policy glitches could make a difference on the ground.
Sumit Naib, Director- Regulatory, Nangia & Co LLP maintains that while TReDS has so far shown tremendous growth having processed over Rs 24,000 crores worth of invoices and assisting over 14000 MSMEs in this process, yet the total number of MSMEs registered on TReDS is still less than 1% of the total MSMEs.
One of the most significant reasons for TReDS not achieving adequate traction has been the role of nodal regulators, viz., the MSME Ministry having been overshadowed by the financial services regulator supervising the TReDS platform, i.e., the RBI, he reasons.
“While the regulatory powers to implement the scheme were retained with the RBI, the nodal ministry’s role, it seems, was not adequately carved out. As a result, the Ministry of MSME has so far not been able to market benefits offered to MSMEs under the scheme well. Till date, there are no internal/ external links or any suitable guidance available on the MSME portal for registration under TReDS. This lack of adequate promotion and dissemination of information to the MSMEs has led to such low registrations on the TReDS portal,” Naib contends.
He adds that while the government has made it mandatory for all PSUs to register on TReDS, yet over 100 PSUs remain unregistered on the portal. Echoing similar views, Animesh Saxena, President, Federation of Indian Micro & Small and Medium Enterprises (FISME), in its key recommendation for the upcoming budget has asked for all government entities-Central as well as States’- should be mandatorily brought on the TReDS platform irrespective of their turnover.
Need for pragmatism
A common view held among the MSME circle is that TReDS is not practical and is not in tune with the existing corporate-MSMEs interplay. Not many can deny that across the nation’s business landscape, paying later than the scheduled time is quite the norm.
Recently, The MSME ministry had written letters to the hundreds of top corporates urging them to clear dues pending to MSMEs. A cursory look at MSME Samadhan shows crores stuck with the government departments, corporates and PSUs.
If big corporates remain outside TReDS, there is little motivation for MSMEs to join. Naib highlights that currently it is not mandatory for the private sector to register on TReDS. As a result, the MSMEs whose customers are not registered on TReDS cannot avail the benefits of the platform. Another factor discouraging big corporates to register on TReDS is the fear of competitors identifying their supply chain network, Naib flags, adding the government, therefore must put in place measures to allow accessibility of customer data to the registered financiers only and not to the other TReDS participants.
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