Small ticket sizes, lack of credit history, and insufficient collateral to raise funds from the traditional banking system are the primary issues faced by small businesses.
Micro Small and Medium Enterprises (MSMEs) are the driving force behind Make in India, Vocal for Local, and Aatmanirbhar Bharat initiatives. They are audaciously coping with the supply chain disruptions caused by the covid-19 pandemic and the ongoing Russia-Ukraine geopolitical issues.
Invoice discounting or supply chain financing (SCF) is one of the most viable options for MSMEs to break the vicious cycle of unpaid invoices to meet their working capital requirements. In the process, the supplier sells its invoices to the financier (factor) at a discount to avail immediate cash in hand.
On the other hand, the buyer can get a short-term credit by extending his payables. Trade Receivables Discounting System (TReDS) platforms digitize the SCF process and act as a bridge between buyers, suppliers, and financiers. The system addresses the primary concern of credit availability to MSMEs.
Small ticket sizes, lack of credit history, and insufficient collateral to raise funds from the traditional banking system are the primary issues faced by small businesses. The invoice auctioning mechanism gives MSMEs the bargaining power to avail short-term credit at competitive interest rates with multiple financiers onboard.
Progressive State Government Initiatives to aid MSMEs The Reserve Bank of India (RBI) spearheaded the TReDS platform launch to help small businesses meet their working capital needs through invoice discounting. The Union Government has mandated companies with a turnover of Rs 500 crores to onboard onto the Trade Receivables Discounting System (TReDS) platforms to democratize the digital ecosystem. Various initiatives like the Emergency Credit Line Guarantee Scheme (ECLGS) have widened the scope for credit availability to MSMEs. The central and state government authorities have started to adapt to the TReDS ecosystem to address the
concerns of small businesses by providing cost-effective credit access to help their operating cycles.
The Government of Goa was the first state government to onboard the TReDS platform and set up an exemplary model for other states by helping more than 250 MSMEs tide through the rough waters and clearing the outstanding dues of 750 crores till date.
Since Goa is a travel destination, and economic activities in the state are primarily boosted by tourism, MSMEs in the region incurred huge losses because of diminished tourism revenues led by lockdowns and subsequent covid waves. Small businesses struggled to survive, and the state tax collection rate took a dip.
Many MSMEs have large outstanding with state government agencies. The Goa government proactively took charge of the situation and onboarded onto RXIL TReDS platform. This enabled prompt encashment of account receivables for the suppliers (MSMEs) while the buyers (government authorities) received favorable payment terms from financial institutions. There was no immediate expenditure from the state government’s treasury, and automated repayments to financial institutions were triggered on the agreed due dates. The state Public Works Department (PWD), Electricity, and Goa Infrastructure Development Corporation have set examples by settling invoices through the TReDS ecosystem.
With the digitization of the factoring process, buyers, suppliers, and financiers are onboarded on one platform, making the process transparent, cost-effective, and time-efficient. Digital SCF platforms offer one-time digital verification, access to digital invoices, and transaction capabilities at a click of a button. The financiers’ risk is mitigated since loans are disbursed to government entities with credit history and higher credibility. With rising NPAs in the books of banks and NBFCs, this arrangement is a win-win situation for all parties.
In the post-covid era, when the economy is reviving back to normalcy, many state governments are following the suit to aid MSMEs whose operating cycles have faltered due to unpaid invoices.
The synchronous efforts by the union and state governments to help MSMEs onboard the TReDS platforms is a very progressive approach, inspiring private players as well. Digital SCF platforms provide a robust infrastructure and integrate technology and government policies to promote the financial inclusion of MSMEs. Digital transformation will instill confidence among financiers to move from an asset-backed approach to a cash flow-based assessment for MSMEs and will help them reap the benefits of invoice discounting.
(The writer is is MD & CEO of Receivable Exchange of India)