Employees use sewing machines on a production line at the CBC Fashions Pvt. factory in Tiruppur, Tamil Nadu, India (Photographer: Dhiraj Singh/Bloomberg)

TReDS - Bill Discounting Sees Early Success But Challenges Remain

Delayed payments from clients, including large firms and sometimes even government units, has been a persistent problem for the country’s small businesses. While large businesses may also face similar problems, smaller firms find it tougher to get the working capital needed to tide over a period of delayed payments.

To address this problem, the Reserve Bank of India proposed the Trade Receivable Discounting System in 2015 and licensed three entities to set up these platforms.

These include Receivables Exchange of India Limited, Invoicemart by A.TREDS, and M1xchange. RXIL began operations three years ago, followed by Invoicemart and M1xchange in 2017.

Volume Pick-Up

In the time that these platforms have been live, volumes have picked up, although financing is limited to suppliers of large firms.

Data sourced by BloombergQuint from the three platforms shows that the volume of transactions rose to Rs 1,522 crore in the quarter ended December 2018 compared to Rs 22.79 crore in the three months ended September 2017 — the first quarter for which all three exchanges had volume data.

BloombergQuint could not independently verify this data since it is not publicly reported.

Across the platforms, 63,859 bills were discounted in the September-December 2018 quarter, nine times as many as those discounted in the same quarter a year ago.

Apart from rising volumes, representatives of these platforms suggest that the number of companies discounting receivables has also been inching higher. Both Invoicemart and M1xchange have brought on-board over 100 companies and at least 1,000 micro, small and medium enterprises who supply to them. In the beginning, companies took time and their vendors had to be guided on how the platform worked, said Kalyan Basu, managing director and chief executive officer at Invoicemart.

Banks, too, had to be convinced to take on the credit risk associated with trade receivable discounting on a digital platform, added Sundeep Mohindru, CEO of M1xchange. It took marathon meetings with over one hundred risk officers nationwide to convince banks to come on-board the platforms, said Mohindru, while adding that lenders have became more confident after seeing through a few payment cycles.

All platforms expect a further pick-up in registrations after the government mandated all companies with a turnover of over Rs 500 crore to be brought on the platform in November 2018.

How The Platform Works

Once the MSME seller delivers goods along with an invoice, they can create a bill or an invoice on the system. The bill or the invoice, called a factoring unit on TReDS, is consequently accepted by the buyer.

This factoring unit is then rated by TReDS. Some of the factors used for such a rating include:

  • External rating of the buyer of the goods
  • Credit history of the buyer of the goods
  • The nature of the underlying instrument
  • Any previous instances of delays or defaults by the buyer in transactions on TReDS platforms.

The platforms also permit reverse factoring, initiated by the buyer.

The rate of discounting varies based on the rating assigned by the platform. It can range between 8.5 percent to 12.5 percent per annum, depending on the buyer’s credit profile, said Shekhar Bhandari, senior executive vice president and business head for global transaction services at Kotak Mahindra Bank Ltd.

An MSME’s ability to raise financing against bills to a large corporate will also depend on the bank’s willingness to expose itself to that corporate.

Banks specify a credit limit to the anchor corporate and based on their credit parameters they bid for specific invoices, said Ajay Gupta, senior general manager at ICICI Bank Ltd.

TReDS - Bill Discounting Sees Early Success But Challenges Remain

Will It Solve The Larger Problem?

While the trade receivables platforms have been successful in pushing up volumes, they are still only tackling a part of the financing problems faced by small businesses.

So far, financiers are willing to discount invoices of MSMEs that supply to mid to large corporates, said Mukesh Agarwal, director at RXIL. Banks are not willing to take a risk on MSME’s apart from those supplying to large corporates at this stage, agreed Mohindru.

As MSMEs do not have much recourse in the case of defaults, invoices to unknown buyers may not be accepted by financiers even as the platforms develop, stated a research paper by Niti Nandini Chatnani, associate professor at Indian Institute of Foreign Trade. This is because banks find it difficult to authenticate small business invoices and the secondary market will be small till volumes develop, she said.

Not everyone sees this as a drawback.

Saurabh Tripathi, senior partner and managing director at BCG India said that the business opportunity presented by corporates and their vendors is large enough. He added that the platforms were never meant to cover the entire gamut of MSMEs in the economy.

Chatnani, in her paper, identified another concern.

Large companies are sometimes reluctant to be on these platform for fear of competitors identifying their suppliers. Companies are also uncomfortable uploading suppliers invoices online as it means that they would have to be settled within the stipulated time period, she wrote. Still, Chatnani, believes that the Indian model has proved to be more successful than similar attempts in other countries.