The document summarizes Trade Receivable Discounting System (TReDS), an initiative by the Reserve Bank of India to facilitate MSME receivable payments from corporate buyers. TReDS is an online platform that allows MSME suppliers to auction their receivables from large corporates to multiple financiers, enabling prompt payment of receivables to MSMEs. The key participants in TReDS are MSME suppliers, corporate buyers, and financiers/banks. TReDS addresses working capital issues of MSMEs by expediting their receivable payments and providing access to competitive bidding on receivables.

1. Trade Receivables
Discounting Systems
(TReDS)
CA.RAJAN JAIN

2. COMPOSITE CRITERIA : INVESTMENT in PLANT & MACHINERY
AND ANUUAL TURNOVER
MSME REVISED CLASSIFICATION w.e.f. 1 July 2020
CLASSIFICATION Micro Small Medium
Manufacturing
Enterprise and
Enterprises Rendered
in Service
Investment in Plant
and Machinery or
Equipment: Not More
than Rs.1 Cr and
Annual Turnover not
more than Rs.5 Cr
Investment in Plant
and Machinery or
Equipment: Not More
than Rs.10 Cr and
Annual Turnover not
more than Rs.50 Cr
Investment in Plant
and Machinery or
Equipment: Not More
than Rs.50 Cr and
Annual Turnover not
more than Rs.250 Cr

3.  Trade Receivable Discounting System (TReDS) is an initiative of Reserve Bank of
India (RBI) to facilitate MSME receivable payments from corporate
 The main objective of the TReDS platform is to address the critical needs of
MSMEs i.e. the twin issue of promptly en-cashing receivables and eliminating
credit risk. TReDS platform is a catalyst in the growth of MSMEs by bringing in
transparency in the business Eco-Systems.
 TReDS platform enables discounting if invoice/bill of exchange of MSME sellers
against Large corporates , including Government Departments and public sector
undertakings through an auction mechanism to ensure prompt realization of trade
receivables at competitive market rates
Trade Receivable Discounting System (TReDS)

4.  Trade Receivable Discounting System (TReDS) is the first attempt in India to
introduce factoring without recourse to the seller and will help MSME seller , not
only in quick realistion of receivables but also efficient price discovery .
 TReDS is an institutional mechanism set up in order to facilitate the trade
receivable financing of MSMEs from corporate buyers through multiple financiers.
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
introduced the concept of TReDS, a mechanism of trade receivables financing for
MSMEs on a secure digital platform
Trade Receivable Discounting System (TReDS)

5.  Invoice discounting on TReDS involves three participants MSME Supplier,
Corporate Buyer and Financier. The invoice is uploaded by either buyer or supplier
depending on the method of discounting and is approved by the other party. Once
the invoice is approved the financiers on the platform start to bid on the invoice.
The supplier accepts the bid and the discounted amount is credited in its account in
T+2 day, where T is the day of acceptance.
 TReDS is an answer to the everlasting cash flow issues of the MSMEs in India and
effective solution to drive the MSME sector to the next phase of Indian economy.
 However 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 corporates
enjoy extended payment cycle. It also enables the corporate to better negotiate
with their MSME suppliers on the procurement cost.5
Trade Receivable Discounting System (TReDS)

6.  On November 2, 2018 the Department of Micro, Small and Medium Enterprises
issued a notification stating that all companies registered under Companies Act
and having a turnover of more than INR 500 crores and all Central Public Sector
Enterprises are required to on board a TReDS platform, thus making TReDS
registration mandatory for such companies. The Registrar of Companies (RoC) in
every state has been nominated to be the competent authority to monitor the
compliance of this notification.
 The Institute of Company Secretaries of India (ICSI) received a communication
from the Ministry of Corporate Affairs (MCA) to advise Company Secretaries of
such companies to ensure that these companies are registered on a TReDS
platform at the earliest and confirm compliance. To ease the TReDS platform
registration process, M1xchange has simplified the steps of onboarding. A user can
simply fill a small form and can register on the TReDS platform with one-time
documentation.
Trade Receivable Discounting System (TReDS)

7.  The process flow of the TReDS has to enable at the minimum, the uploading of
invoices/bills and creation of factoring units by the MSME sellers; its acceptance by
the corporate and other buyers, including the Government Departments and PSUs,
within a specified time limit; discounting, rating and re-discounting of factoring
units; sending of notifications at each stage to the relevant parties to the
transaction; reporting and MIS requirements; and finally, generation and
submission of settlement of obligations. In case of reverse factoring, the buyer
could also create factoring units based on the documents uploaded by the MSME
seller.
 In case of financing on the basis of invoices, an assignment agreement would need
to be executed between the MSME seller and the financier. Alternatively, this
aspect may be incorporated in the agreement between the MSME seller and the
financier, to the effect that any financing transaction on TReDS will tantamount to
an assignment of receivables in favour of whoever is the financier.
Trade Receivable Discounting System (TReDS)

8.  Critical to the operations of the TReDS is the mechanism that ensures timely
settlement of funds between the member financiers and the MSME sellers (when
the factoring unit is financed) and the subsequent settlement of funds between the
member buyers and the respective financiers on due date of the factoring unit. In
order to ensure a smooth process of such payments, the TReDS would be required
to:
 Trigger settlement between financier and MSME for accepted bids - In respect of
all factoring units financed on a given day, the TReDS will generate the payment
obligations of all financiers on T+2 basis and send the file for settlement in any of
the existing payment system as agreed among the system participants. The
TReDS would have to put in place a separate recourse mechanism to handle
settlement failures in respective payment systems.
Settlement Process

9.  Trigger settlement between the buyer and the ultimate financier on due date - the
TReDS would generate the payment obligations file and send the same for
settlement on due date to the relevant payment system.
 The TReDS will generate the settlement files and send the same to existing
payment systems for actual payment of funds. This would ensure that the inter-
bank settlement (between the bankers representing member MSMEs, buyers and
the financiers) will take place and defaults, if any, by the buyers will be handled by
the buyer’s bank and will not be the responsibility of the TReDS. Hence, the
settlement process ensures payments to relevant recipients on due date, thus,
facilitating the smooth operations on the TReDS. However, it would not entail a
guaranteed settlement by the TReDS.
Settlement Process

10. TReDS Platform
TReDSPlatform
MSME Suppliers –
Supplying goods and
services to buyers
Buyers- Corporate ,
Government Departments,
PSU & Others
Financers- Banks , NBFC
Factors

11.  Competitive price discovery
 Without recourse to seller
 MSME have the right to choose best bid
 Payment received on T+2 on successful auction
 No follow up with the buyers for payments
 Not dependent on single financier
 Widening the finance options
 Enhanced productivity and efficient liquidity Management
Key Benefits to sellers

12.  Compliant with MSME ACT 2006
 Can negotiate better terms with MSME vendors
 Lower cost of input for buyers
 Lower administrative cost
 Can avail extended credit period
 Competitive price discovery
 Efficient cash flow Mangement
 Ensure that their Vendors are not strapped for cash/working capital
Key Benefits to Buyers

13. THANK YOU