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A Parliamentary Standing Committee wanting to make the Trade Receivables Discounting System (TReDS), an online factoring platform, mandatory for all the arms of the central and state governments makes eminent sense. This is a necessary but insufficient condition to infuse life into the MSME sector, hit hard by demonetisation, the subsequent slowdown and, then, the pandemic. Already, all companies with a turnover of ?500 crore have to mandatorily register on TReDS. Adding to this lot the railways and defence, with huge outstanding payments to MSMEs, will help ease the latter’s working capital shortage.
Failure to come on to the TReDS platform, which puts an end to the monopsony power of large buyers vis-à-vis small vendors, must be declared an offence. This will ensure compliance. Around 20,000 MSMEs and 1,600 buyers (with a turnover of over ?500 crore) are now registered on TReDS. The total value of dues settled over the platform is estimated at over ?30,000 crore. The process involves small suppliers raising invoices on large buyers, with participating banks and non-banking financial companies carrying out factoring, that is, taking over the bill collection and paying small suppliers their dues upfront minus a discount pegged to the creditworthiness of the large buyer, to whom the finance provider turns creditor. Realising the full potential of TReDS will reduce working capital costs and boost liquidity.
However much TReDS smoothens MSME access to trade credit, the sector still needs more capital, preferably as equity that needs to be serviced only when profits are made. The fund of funds, announced by the government last May, was meant to mobilise over ?50,000 crore to invest in MSMEs. It must be operationalised swiftly.
This piece appeared as an editorial opinion in the print edition of The Economic Times.