Micro, Small and Medium Enterprises (MSMEs) play an important role in the economic fabric of the country. The sector had been facing constraints in obtaining adequate finance, particularly in terms of their ability to convert their trade receivables into liquid funds. To address this pan-India issue, setting up of and operating TReDS was conceptualised.
TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).
TReDS is a payment system authorised under the PSS Act. It is a platform for uploading, accepting, discounting, trading and settling invoices / bills of MSMEs and facilitating both receivables as well as payables factoring (reverse factoring). MSME sellers, corporate and other buyers, including Government Departments and PSUs, and financiers (banks, NBFC-Factors and other financial institutions, as permitted) are direct participants in the TReDS and all transactions processed under this system are '"without recourse" to MSMEs.
Initially, three entities were authorised to operate TReDS. To encourage innovation and competition through increased participation, 'on-tap' authorisation was introduced in October 2019. New players would be authorised considering the merits of the proposal and assessment of potential for additional entities.
Sellers, buyers and financiers are the participants on a TReDS platform.
Only MSMEs can participate as sellers in TReDS.
Corporates, Government Departments, PSUs and any other entity can participate as buyers in TReDS.
Banks, NBFC - Factors and other financial institutions as permitted by the Reserve Bank of India (RBI), can participate as financiers in TReDS.
Broadly, following steps take place during financing / discounting through TReDS:
RBI has not made it compulsory for any buyer, seller or financier to participate in TReDS. The response has been tepid from the buyers' side. Reasons for their reluctance could range from internal processes, indifferent attitude towards payments to be made to MSMEs, balance sheet related compulsions, etc. In view of this, the Government has made it compulsory for certain segments of companies to mandatorily register as buyers on TReDS platform(s). The government directive, however, does not make it compulsory for these entities to perform transactions in TReDS.
A Factoring Unit (FU) is a standard nomenclature used in TReDS for invoice(s) or bill(s) of exchange. Each FU represents a confirmed obligation of the corporates or other buyers, including Government Departments and PSUs.
In TReDS, FU can be created either by the MSME seller or the buyer. If MSME seller creates it, the process is called factoring; if the same is created by corporates or other buyers, it is called as reverse factoring.
Yes. The TReDS could deal with both receivables factoring as well as reverse factoring.
No. The transactions processed under TReDS are “without recourse” to the MSMEs.
Source : RBI