RBI expands scope of TReDS platform

February 10, 2023

The TReDS is Trade Receivables Discounting System. It facilitates finances for MSMEs. The major drawback of the MSME platform is that they are unable to convert the trade receivables into liquid funds. The TReDS mainly addresses this issue. Trade receivable is the amount that the buyer or the customer owes to a company or organization or business while buying a product.

What is RBI saying?

The Reserve Bank of India recently announced that it will expand the TReDS platform. This is being done to increase insurance facilities in the country. Also, RBI aims to add the factoring businesses as financiers to the TReDs. Under the TReDs businesses, financial companies or government organizations can provide financial support to the MSMEs. Now the factoring businesses are being added.

What are factoring businesses?

Say company A is manufacturing XXX smartphone. It sells the smartphone to 10 customers. Say, the cost of each phone is Rs 10,000. And therefore, the total sale is one lakh rupees. The customers are paying through EMI. So it takes a while (assume the EMI period to be 10 months) to get the entire one lakh. Meanwhile the suppliers of A, for instance, battery suppliers, wire suppliers, etc are demanding money. Now to pay the money to these suppliers A will go in search of factoring businesses.

A will show the invoice of its sale to 10 customers. And gets one lakh rupees; assuring to return when the customers pay their EMIs completely. The company that gives this one lakh to A is called the factoring company.

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