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MSME constitute around 1/3rd of Indian GDP, around 40% of overall exports, 45% of manufacturing output, generating around 70M employment opportunities in India. They are important partners in the value chain of large enterprises and MNCs. In a 2014 Firstbiz-Greyhound knowledge survey (sample size 540), biggest headwind faced by MSME is dearth of easy finance and credit instruments as per 79% of respondents. Most MSME rely on informal access to credit resulting in high cost of funding, higher defaults, inefficient mgmt. of working capital etc. Trade receivables discounting system (TReDS) aims to bridge this financing gap between MSME and financial institutes.
TReDS platforms are regulated by RBI. As of this writing, there are three TReDS licenses issued by RBI (link)
|Name of entity||Payment systems||License issue / validity date|
|A TREDS limited||Invoicemart||June 29, 2017 / June 30, 2022|
|Mynd Solutions Private limited||Mynd online national exchange (M1xchange)||March 20, 2017 / March 31, 2022|
|Receivables exchange of India (RXIL)||RXIL||May 17, 2017 / June 30, 2022|
Some key terms that we will use in this article are:
- Buyer – PSU, corporates
- Seller – enterprises as per MSMED Act 2006
- Financier – Banks, NBFC
- Factoring unit (FU) – invoice or bill on TReDS platform
- TReDS platform – RXIL, M1, Invoicemart
- Reverse factoring – Buyer raises invoice to create factoring unit
TReDS platform workflow:
In a typical TReDS transaction, process flow is as following:
- MSME vendor (Seller) uploads invoice or bill of payments – thus creating a factoring unit. If buyer uploads such invoice, it becomes reverse factoring unit.
- Counterparty approves factoring / reverse factoring unit as next step.
- Once approval is done, this factoring unit is visible to all the financiers on the system and now they can start bidding on it. Financier can also check CERSAI registration system to make sure that factoring unit is being bid only once. This step is very critical. M1xchange is using blockchain technology to avoid duplication.
- At the end of bidding process, bid gets accepted by Seller / Buyer. It can be best bid or any other bid. Usually lowest price / best bid is the winner.
- TReDS platform creates a formal obligation process.
- Post obligation process, financier pays Seller through TReDS platform on a T+2 settlement basis.
- On due date, buyer pays financier.
TReDS platform gets paid a take rate on per transaction basis. Each platform grows by bringing in more buyers /corporates that bring in their vendors / MSME / Sellers on the platform. This brings more financier – banks and NBFC on platform. As SME digitization takes place in tier 2, tier 3 cities and villages in India in next decade, I believe these platforms have a great opportunity to create credit flywheel for Indian MSME. Over time, this process can be extended to non MSME and cross border trades (probably outside TReDS platforms). Basically as TReDS platforms develop and do more business with corporate buyers, hopefully they can get integrated into their ERP system and can unlock more value in future.
Overall, I am very bullish on TReDS platforms over next decade and am glad to be part of this journey through our investment in M1xchange.