Setback for MSMEs, state-run companies hesitant of adopting TReDS despite govt diktat – The Economic Times

Clipped from: https://economictimes.indiatimes.com/small-biz/sme-sector/state-run-companies-hesitant-of-adopting-treds-despite-govt-diktat/articleshow/84185564.cmsSynopsis

At the heart of the problem is the pace at which CPSEs approve invoices, said Sundeep Mohindru, the chief executive officer of M1Xchange, a TReDS platform. These companies often take 45-60 days to approve invoices. By this time, the CPSEs also usually settle the payment.

The government’s move to get public sector companies on the Trade Receivables Discounting System (TReDS) — a central bank-backed invoice discounting regime — to improve liquidity with small businesses has made little headway with many state-run firms yet to conduct a single transaction on these platforms.

As per data accessed by ET, of the total transaction volume of about Rs 36,000 crore conducted by the three TReDS exchanges in India so far, only Rs 2,700 crore was from central public-sector enterprises (CPSEs).

At the heart of the problem is the pace at which CPSEs approve invoices, said Sundeep Mohindru, the chief executive officer of M1Xchange, a TReDS platform. These companies often take 45-60 days to approve invoices. By this time, the CPSEs also usually settle the payment.

“The challenge is that invoice approval itself happens beyond the due date in many cases,” he said. This defeats the purpose of having TReDS platforms.

In comparison, private companies take about 5-15 days to acknowledge an invoice on such platforms, after which the MSME supplier gets the approved funds.

TReDS works as an exchange between lenders, buyers and micro, small and medium enterprises. Lenders bid to settle the claims of an MSME supplier upon the acknowledgment of the invoice by the buyer. The buyer then repays the lender, which is usually a bank, after a predetermined period.

There is no collateral involved, and lenders consider the buyer’s credit rating while paying the supplier. This helps MSME suppliers of large companies to access credit before the due date and improve their cash-flow cycle by paying a small interest.

The three TReDS platforms are RXIL, Invoicemart and M1Xchange.

The government had mandated in 2017 that all CPSEs sign up on the TReDS platforms to improve the cash flows of MSMEs. A senior executive at a TReDS platform told ET that many of these companies have yet to comply with New Delhi’s diktat.

Moreover, even some of the CPSEs which have signed up on TReDS have conducted little business on the exchanges, this executive said, asking not to be identified.

On M1Xchange, 69 CPSEs have registered themselves on the platform but 49 have yet to make even a single transaction on the exchange. Of the total volume of Rs 14,300 crore the company has handled so far, only Rs 106 crore came from CPSEs.

The CEO of a TReDS platform told ET last year that a “majority of buyers register only for compliance purpose and without any intent to use the platform”.

Meanwhile, private companies have been increasingly adopting TReDS, especially during the lockdowns to support their suppliers. M1Xchange, which has been operational for four years, said it did more than 13% of its total business in the June quarter alone.

According to a parliamentary report in 2021 prepared by a committee headed by Jayant Sinha, India’s factoring, or receivables discounting, market is “at a very nascent stage” with its size currently pegged around $6 billion.

As a percentage of GDP, it is significantly lower (0.2%) than comparable developing economies such as Brazil (4.1%) and China (3.2%). The European factoring market currently dominates the global industry and India has a chance to disrupt this.

Reserve Bank of India-regulated TReDS, in short, is a mechanism that allows buyers and sellers, which are typically the corporates and MSMEs, to settle routine contracts electronically where banks and NBFCs on the platform can bid in real time for invoices they want to finance at competitive rates.

ET in August 2020 reported that only 32 of the 255 CPSEs mandated by New Delhi to settle vendor dues on TReDS had made even a single transaction on the platform since it was introduced in 2017.

More than 100 CPSEs had not even registered on the platform as of August 2020, despite the government seeking mandatory compliance a number of times.

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