Posted by Himani Bihani
On 22 May 2020

Overview: A platform for MSMEs to speed up the process of recovery of money from their customer. An MSME needs to approach Financiaries who are providing the facility of TReDS to the MSME. Today, lots of Banks and Financial Institutions are providing the facility of TReDS to the MSMEs. 

MSMEs, despite their important role in contributing to the Indian economy, continue to face constraints in obtaining adequate finance. One big factor which affects the ability of MSMEs to convert trade receivables into liquid funds are slow paying invoices. To address the financing related issues faced by MSMEs in India, RBI in 2014 introduced the concept of TReDS, a mechanism of trade receivables financing for MSMEs on a secure digital platform.

TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers (i.e. Banks and others notified). These receivables can be due from corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs).

Following are the Salient Features of TReDS :-

  • Unified platform for Sellers, Buyers and Financiers
  • Eliminates Paper
  • Easy Access to Funds
  • Transact Online
  • Competitive Discount Rates
  • Seamless Data Flow
  • Standardized Practices

the benefit of TReDS is not only limited to the MSME Sector, it helps the corporate buyers to purchase goods and services from MSME suppliers. Since the MSMEs are immediately paid through the approved financiers, the corporate enjoy extended payment cycle. It also enables the corporate to better negotiate with their MSME suppliers on the procurement cost.

Who are required to register themselves in TReDS?

Invoice discounting on TReDS involves three participants MSME Supplier, Buyer and Financier.

Participants Eligibility Whether registration mandatory or not?
Buyer Corporate including companies and other buyers including Government Departments and Public Sector Undertakings and such other entities as may be permitted by the RBI. Mandatory for all companies with a turnover more than Rs. 500 crore and all Central Public Sector Enterprises vide Notification dated November 02, 2018.
Seller MSME entities as per the definition of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). Optional  
Financier Banks, NBFC Factors, Financial Institutions and such other Institutions as permitted by the RBI. Optional

What are the various documents required for registration in TReDS?

The various documents required are as follows:

· Application Form

 · KYC Documents of the Applicant Entity

             o PAN

             o Certificate of Incorporation

             o Memorandum & Article of Association

            o Address Proof of the registered entity

· KYC Documents of the promoters, administrators, authorised signatories, etc.

 · Designated bank related documents

 · Master Agreement

· Bank confirmation letter 

How does TReDS work?

 Broadly, following steps take place during financing / discounting through TReDS:

  1. Creation of a Factoring Unit (FU) – standard nomenclature used in TReDS for invoices or bills of exchange – containing details of invoices / bills of exchange (evidencing sale of goods / services by the MSME sellers to the buyers) on TReDS platform by the MSME seller (in case of factoring) or the buyer (in case of reverse factoring);
  2. Acceptance of the FU by the counterparty – buyer or the seller, as the case may be;
  3. Bidding by financiers;
  4. Selection of best bid by the seller or the buyer, as the case may be;
  5. Payment made by the financier (of the selected bid) to the MSME seller at the agreed rate of financing / discounting;
  6. Payment by the buyer to the financier on the due date (i.e.,  T+1 day, where T is the day of acceptance.)

 Whether defaults on TReDS platform are the responsibility of TReDS entities?

Ans. No. Default handling is outside the purview of TReDS platforms.

What is a settlement file and who generates it in TReDS?

 A settlement file provides information as to how much amount has to be debited from and credited to the accounts of participants (sellers, buyers and financiers), due on a particular date / time.

In other words, it indicates how much a financier has to pay to an MSME seller, and how much a buyer owes to the financier on a particular date / time. The TReDS entities generate the settlement file and send the same to existing payment systems for actual payment of funds.

Is there a time frame for the buyers to get themselves registered?

The Notification issued by the Ministry of MSME does not specify any time frame within which a company has to onboard on the TReDS Platform. Further, the communication issued by the Institute does not prescribe a statutory timeline to ensure the registration of the companies on TReDS platform.

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