TReDS: The Pandemic Brought A Silver Lining For Trade Receivable Platforms
The Covid-19 pandemic, which accelerated digitisation across a number of sectors, also brought increased traction for trade receivable platforms, which attempt to solve the age-old problem of payment delays for small businesses.
These platforms, which rolled out starting 2017, are all reporting a jump in volumes of receivables financed, with a noticeable jump in the months after the pandemic hit. As the business grows, it is also attracting new entrants with BSE Ltd. intending to enter the space.
The journey of Trade Receivables Discounting System or TReDS before and after Covid has been quite different, said Ketan Gaikwad, managing director and CEO at RXIL, one of the country's three TReDS platforms. "Before Covid, we had to convince customers to come to the platform. Now, corporates are more amenable towards the platform and more active on it."
Sundeep Mohindru, CEO at M1xchange, has seen similar change at their platform. Amid the pandemic, large corporates saw MSMEs suffer and unable to raise funds and that has brought a change in outlook, he said. Most banks were risk averse despite high liquidity and weren't lending to MSMEs, leaving these small businesses cash strapped and looking at all available options. Current business every month is twice of what it was pre-pandemic, said Mohindru.
At RXIL, the amount financed rose to Rs 6,502 crore in FY21 from Rs 2,300 crore in FY20.
For M1xchange, the amount financed was at Rs 5,651 crore in FY21 compared to Rs 4,056 crore in FY20.
While RXIL has discounted bills worth Rs 4,854 crore up to September for the current financial year, M1xchange has discounted bills worth Rs 4,556 crore.
While there was a slowdown when the first wave hit, there is now a complete reversal, accompanied with a sharp rise in the past six months, said Prakash Sankaran, managing director and chief executive officer at Invoicemart. The company declined to share data on the amount financed in FY21 and FY20.
TReDS platforms, first proposed by the Reserve Bank of India in 2015, are intended to help small businesses unlock their dues in time. Long delays in payments have plagued these businesses for years and added to the need for working capital.
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.
Once rated, a financier applies a discount rate and gives the MSME its dues upfront while waiting for the buyer of goods to make good on the payment. What may have precipitated more activity on the platforms in the aftermath of the pandemic is simply lack of choice and increased awareness. MSMEs have easy access to the platform and many are now digital savvy, Sankaran said.
Word-of-mouth and outreach programmes may have also widened the reach, Mohindru said. While transactions on the platforms were earlier originating from about 300 cities, now they're spread across more than 600 cities, he said.
While there were some instances of early defaults, there was no sharp spike during the pandemic. This, too, may have brought in more lenders to finance receivables.
TReDS hasn't seen a rise in defaults, Shekhar Bhandari, president for global transaction banking at Kotak Mahindra Bank Ltd., said. Players have become efficient and all the players on the platform know when a buyer defaults and that works as a deterrent, he explained.
In fact, there has been a considerable drop in discount rates. For instance, some corporates whose invoices were attracting a discount rate of 7.5% last year, are now discounting at below 5%, according to Gaikwad. It's a significant move, he said.
Rates are now highly competitive, ranging between 3.5-8%, with the lower end of the spectrum in the PSUs, Navratnas segment, Sankaran said.
The pandemic has also encouraged financiers to be more competitive and manage their working capital more efficiently, Bhandari said. Additionally, financing on TReDS qualifies as priority sector loans, encouraging financiers to be more competitive.
The New Entrant
Perhaps the best indication of the TReDS business starting to come of age is the new competition it is attracting. BSE Technologies Pvt, a wholly owned subsidiary of BSE Ltd., has received an in-principle approval from RBI to set up and operate a TReDS platform.
Penetration on TReDS remains very low, said Ajay Thakur, head, BSE SME & Startups. Given that, Thakur thinks that a large platform like BSE can make a difference.
We're well-known, well-placed, technologically adept and can reach a large number of MSMEs and help facilitate their transformation to medium and large corporates.Ajay Thakur, Head - BSE SME & Startups
With existing platforms for SMEs, startups, mutual funds, commodities, and our existing database, the goal is to create an ecosystem, he said.
The RBI has shared further requirements that the platform is working to fulfill. "We want to start as early as possible," Thakur said.
Small Steps To More Volumes
Alongside the pandemic push, recent policy changes could also help push up volumes further.
End-to-end digital onboarding has been permitted from August last year and this already has helped increase the number of MSMEs on the platform, Gaikwad said. If a vendor is registered on Udyam, they only need to enter their PAN number for registration, Mohindru said. Udyam is a government platform for MSME registration.
Two other recent announcement could make a difference.
Trade credit insurance is set to come into effect from Nov. 1, 2021 as per the Insurance Regulatory and Development Authority guidelines. However, the RBI has to provide revised TReDS guidelines and approve the trade credit insurance. It will be a game changer, Gaikwad said. Bankers are reluctant to take a risk on corporates with low credit ratings. If they are to get insurance cover, they will be more willing to take a risk, he said.
Mohindru also said that trade credit insurance will mean that more MSMEs will receive financing. So far, banks were unwilling to take a risk on corporates rated BBB and below, he said.
In addition, The Factoring Regulation (Amendment) Act 2021, has widened the scope of the entities that can engage in the factoring business. This could bring in non-bank lenders and improve the availability of financing on these platforms.
The central bank could also soon open the platform to non-MSMEs. While there has been no confirmation from the central bank on this, talks are ongoing and could materialise over the next few months, according to Gaikwad. For corporates, it will be an advantage because they will no longer have to make separate payments to MSMEs and non-MSMEs. That is an administrative and logistic inconvenience, he said.
"All these developments are like sweeteners. They are good to have," Sankaran said. "But, all that truly matters is participation."
Demand for credit by MSMEs is estimated at Rs 37 lakh crore, while the credit gap is pegged at about Rs 20-25 lakh crore. Still, business across the TReDS platforms collectively would only be close to Rs 50,000 crore, Sankaran said.
The Niggling Issues
What continues to hinder a bigger picture in bill discounting is limited participation from large companies, particularly public sector enterprises.
MSMEs are keen to join the platform but are often unable to because the corporates or PSUs they supply to are either not on the platform or not active on it, according to Sushma Morthania, director general at the India SME Forum. An MSME can even lose out on orders if it wants its bills discounted on TReDS, she said. The companies know they will be monitored and are under obligation to repay financiers.
This is especially true in case of PSUs, which have a track record for payment delays.
Between the three platforms, volumes generated by PSUs is not more than about 7-8%, according to Gaikwad. There is no compulsion for them to be on the platform. Besides, it binds them and puts them under an obligation to make the payment on the due date, he said. "There is still need for a push from the government."
Some small businesses also feels that discount rates are high and discounting bills squeezes margins. This could mean lower profitability and greater chances of default. "It's a vicious circle," said Morthania.
Despite the challenges, belief in platforms' potential is unshaken.
Turnovers on the platforms have gone up steadily, Thakur said. "For any financial platform to mature takes a minimum of four-five years to really pick-up."
(Corrects an earlier version that misspelt Sundeep Mohindru's first name)