TReDS is an online system that helps the MSMEs for discounting the Trade receivables through multiple financiers. The TReDS would facilitate the discounting of each invoice as bills of exchange. This way, MSME sellers, company buyers, and banks / NBFCs) would be joined on a single platform. When approval from each the buyer and seller, the banks would bid on invoices and create the payment to the seller.
The MSMEs are the real back bone of Indian Economy. Despite the necessary role contend by them within the economics of the country, still they face constraints in getting adequate finance, significantly in terms of their ability to convert their trade receivables into liquid funds. So as to handle this pan-India issue through putting in of an institutional mechanism for funding trade receivables, there had revealed an idea on “MSME Factoring-Trade receivables Exchange”.
The TReDS system for operating the institutional mechanism for facilitating the funding of trade receivables of MSMEs from company and different buyers, as well as Government Departments and Public Sector Undertakings (PSUs), through multiple financiers are going to be referred to as Trade receivables e-Discounting System (TReDS).
FAQs
1 Who are the participants in TReDS?
Sellers, buyers and financiers are the participants on a TReDS platform.
2 Who will participate as a seller in TReDS?
Only MSMEs as per the definition of the micro, small and Medium Enterprises Development Act, 2006 (MSMED Act) will participate as sellers in TReDS.
3 Who will participate as a buyer in TReDS?
Corporates, Government Departments, PSUs and the other entity will participate as buyers in TReDS.
4 Who will participate as a financier in TReDS?
Banks, NBFC - Factors and different financial establishments as allowable by the central bank (RBI), will participate as financiers in TReDS.
5 Who are needed to register themselves?
This is mandatory for all companies with a turnover over Rs.500 crores and all Public Sector Enterprises. Registration is optional for sellers and financiers within the system.
6 What are the eligibility criteria for the MSMEs to join the TReDS Platform?
The basis of classifying MSMEs is Investment & annual turnover. The new definition of MSME declared recently as a relief to MSMEs in COVID time is as below:
Micro Enterprises - investment less than Rs 1 crore and turnover less than Rs 5 crore
Small Enterprises - Investment less than Rs 10 crore and turnover of less than Rs 50 crore
Medium Enterprises - Investment less than Rs 20 crore and turnover less than Rs 100 crore
7 How will TReDS work?
Broadly, following steps manifest itself throughout funding / discounting through TReDS:
• Creation of a Factoring Unit (FU) - customary language utilized in TReDS for invoice(s) or bill(s) of exchange – containing details of invoices / bills of exchange (evidencing sale of products / services by the MSME sellers to the customer) on TReDS platform by the MSME seller (in case of factoring) or the buyer (in case of reverse factoring);
• Acceptance of the FU by the counterparty - buyer or the seller, because the case might be;
• Bidding by financiers;
• Selection of best bid by the seller or the buyer, because the case might be;
• Payment created by the financier (of the chosen bid) to the MSME seller at the specifed rate of funding / discounting;
• Payment by the buyer to the financier on the due date.
8 what's a Factoring Unit (FU)?
A Factoring Unit (FU) could be a customary language utilized in TReDS for invoice(s) or bill(s) of exchange. Every FU represents a confirmed obligation of the corporates or different buyers, as well as Government Departments and PSUs.
9 Who will establish an FU?
In TReDS, FU will be created either by the MSME seller or the buyer. If MSME seller creates it, the method is termed as factoring; if a similar is made by corporates or different buyers, it's referred to as reverse factoring.
10 whether or not TReDS may handle reverse factoring?
Yes. The TReDS may handle each receivables factoring additionally as reverse factoring.
11 will the financier sell the factoring unit?
The factoring unit could be a tradeable unit and so, it can be sold in the secondary market
12 whether or not the MSME seller would have to be compelled to pay to the financier just in case the buyer defaults in repayment?
No. The transactions processed underneath TReDS are “without recourse” to the MSMEs.
13 whether or not any authorisation is needed to line up and operate a TReDS platform?
Yes, authorisation is needed to be obtained from RBI.
14 what's the eligibility criteria for establishing and operating TReDS?
Eligibility criteria for the aim of establishing and operating a TReDS platform is provided within the norms (as amended from time to time) for TReDS issued by RBI.
15 where am I able to search the main points of TReDS entities authorised by RBI?
List of all authorised Payment System Operators (PSOs), together with TReDS, is obtainable at RBI website: www.rbi.org.in.
16 whether or not TReDS entities undertake KYC (Know Your Customer) of participants?
Yes. The KYC method adopted by the TReDS entities shall adhere to the “Master Direction – Know Your Customer (KYC) Direction, 2016” issued by RBI.
17 what's a settlement file and World Health Organization generates it in TReDS?
A settlement file provides data on what amount has to be debited from and credited to the accounts of participants (sellers, buyers and financiers), due on a specific date / time. To say, it indicates what amount a financier has to pay to an MSME seller, and the customer owes to the financier on a specific date / time. The TReDS entities generate the settlement file and send it to existing payment systems (for instance, National automated Clearing House) for actual payment of funds.
18 whether or not defaults on TReDS platform are the responsibility of TReDS entities?
No. Default handling is outside the compass of TReDS platforms.
Here’s how the TReDS works:
1. The buyer company, Government Departments and Public Sector Undertakings, indicates the intention to buy by executing an order to the MSME seller
2. The MSME delivers the products and generates an invoice. At this stage, there could or might not be an accepted bill of exchange between the buyer and the seller.
3. Thereafter, on the grounds of either an invoice or a bill of exchange, the MSME seller creates a ‘factoring unit’ (which would be a customary terminology utilized in the TReDS for an invoice or a bill on the system) on TReDS. Later, the buyer additionally logs on to TReDS and flags this factoring unit as ‘accepted’. Just in case of reverse factoring, this method of creation of factoring unit may be initiated by the buyer.
4. Based on the invoice or bill of exchange, the TReDS can standardise the time window offered for buyer company to ‘accept’ the factoring units.
5. The MSME seller could plan to endure the TReDS platform and transfer documents supporting proof of the movement of products.
6. The TReDS might have either one or 2 separate modules for transactions with invoices and transactions with Bills of Exchange, if thus needed. In either case, all transactions routed through TReDS can, in effect, manage factoring units regardless of whether or not they represent an invoice or a bill of exchange.
7. Factoring units could also be created in every module as needed. Every such unit can have a similar quality and enforceability as allowed for physical instruments underneath the ‘Factoring Regulation Act, 2011’ or underneath the ‘Negotiable Instruments Act, 1881’.
8. The normal format and options of the ‘factoring unit’ are going to be set by the TReDS platform. However every unit can represent a confirmed obligation from the customer to pay. The unit can have all details like info of the seller and the buyer, issue date, due date, amount due, etc.
9. The TReDS platforms ought to be able to filter these factoring units by any of the above parameters. This provides flexibility of operations to the stakeholders.
10. A notice or advice is formed and mechanically sent to the buyer’s bank once the factoring unit and all the main points are generated.
11. These factoring units may be supported or bid for by any of the financiers registered on the TReDS platform. The derived fund quoted by the financier may be viewed solely by the MSME seller and not other financiers.
12. There'll be a window time provided for financiers to quote these bids against factoring units. Further, financiers are free to select how long their bids are valid.
13. The MSME then chooses and accepts any bid. The financier then gets the notification that their bid has been accepted.
14. Once a bid is accepted by the MSME seller, financiers cannot revise or modify their bid.
15. The factoring unit can then get labeled as ‘financed’ and therefore the funds are going to be deposited within the MSME seller’s account by the financier on T+2 basis (two business days once the date of acceptance). However, TReDS platforms will prefer to speed up the time taken for payment.
16. At the same time, finance by a financier generates another notice to the buyer’s bank that permits an instantaneous debit from the buyer’s account to the financier’s account on the date. These are supported the settlement obligations generated by the TReDS platform.
17. On the date, the buyer company transfers the due amount to the financier. And, the TReDS platform sends due notifications to buyer company and their banks reminding them of the due.
18. If the buyer doesn’t pay on the date, it'll attract penal provisions and change the banker to proceed against the buyer company.
19. Any action during this regard is going to be strictly non-recourse with reference to the MSME sellers.
20. Once finance, these instruments are rated by the TReDS platform and should be more transacted or discounted among financiers within the secondary phase.
21. Any trade in the secondary phase will mechanically lead to an instantaneous debit authority being enabled by the buyer’s bank in favour of the financier.
22. Just in case any factoring unit is unfinanced, the buyer company pays the MSME seller outside of the TReDS platform.
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