Trade Receivables Discounting System
Trade Receivables Discounting System or TReDS is a welcome step by RBI to secure finances for micro, small and medium enterprises. It has been set up under the regulatory framework set up by RBI under Payment and Settlement Systems Act 2007.
Rationale
MSMEs have always been at the receiving end of the wrath of the manipulative practices by large business houses and find it very hard to convert their trade receivables into liquid funds. Thus, RBI has come forward to give effective solution to the pan-India issue and has defined TReDS as the institutional mechanism for financing of trade receivables of MSMEs from corporate buyers through two or more financiers is known as Trade Receivables Discounting System. TReDS deals with discounting of both invoices and bills of exchange. It was well-equipped to deal with both receivables factoring as well as reverse factoring to facilitate higher transaction volumes and better pricing. MSMEs sellers, corporate buyers, financiers which include banks and non-banks will be direct participants in this. TReDS thus serves as a platform to bring these stakeholders and participants together for discounting, trading and settlement of the invoices.
The bankers who are linked to MSMEs and corporate buyers may be provided with the relevant details of discounted invoices of respective clients, if required. TReDS works in two phases-first one deals with discounting of factoring units (invoices/bills) by financiers thus ensuring fund-flow to MSME. The second phase comprises re-discounting of the factoring units by the financiers. Random audits may also be introduced to verify authenticity of invoices and genuineness of the transactions.
There is a standard mechanism in place to get the buyers and sellers on-board. The KYC documentation to know the MSME is simple. TReDS has a one-time agreement between various participants and TReDS. This is referred to as the Master agreement. The latter should have three clauses broadly-obligation to pay on due date, no recourse to disputes regarding quality of endgoods and no off-sets.
