TReDS - Full Form, Meaning Importance, and Benefits

TReDS - Full Form, Meaning Importance, and Benefits. The full form of TReDS is Trade Receivables Discounting System, is an innovative digital platform introduced by the Reserve Bank of India (RBI) to facilitate the financing of trade receivables for Micro, Small, and Medium Enterprises (MSMEs). By enabling MSMEs to convert their receivables into liquid funds, TReDS addresses the critical issue of delayed payments, thereby enhancing their cash flow and operational efficiency.
RBI Notification and Guidelines for TReDS (Trade Receivables Discounting System)
The RBI issued the initial guidelines for TReDS on December 3, 2014, aiming to create a transparent and efficient mechanism for MSMEs to access working capital through the discounting of trade receivables. These guidelines were subsequently updated on July 2, 2018, to expand the scope and operational framework of TReDS. The system allows for the financing or discounting of MSME receivables on a "without recourse" basis by permitted financiers, ensuring that MSMEs are not burdened with the risk of default by buyers.
Purpose of TReDS
The Trade Receivables Discounting System (TReDS) was established to address the financial challenges faced by Micro, Small, and Medium Enterprises (MSMEs) due to delayed payments from buyers. By offering a digital platform for the financing of trade receivables, TReDS aims to enhance liquidity, reduce credit dependency, and streamline payment processes for MSMEs.

Receive Early Payments: MSMEs often encounter prolonged payment cycles, with receivables taking 60 to 90 days or more to materialize. TReDS enables these enterprises to receive payments promptly by allowing them to discount their trade receivables through multiple financiers. This mechanism ensures that MSMEs can convert their pending invoices into immediate cash, thereby mitigating the risks associated with payment delays.

Improve Cash Flow: Timely access to funds is crucial for the smooth operation of MSMEs. By facilitating early payments, TReDS significantly enhances the cash flow of these enterprises. Improved liquidity allows MSMEs to manage their working capital more effectively, invest in growth opportunities, and meet their operational expenses without resorting to high-interest loans.

Reduce Dependency on Traditional Credit: Traditional financing avenues often involve lengthy approval processes and stringent credit assessments, which can be challenging for MSMEs. TReDS offers an alternative by providing a platform where MSMEs can access funds based on the creditworthiness of their buyers rather than their own credit history. This shift reduces the reliance on conventional credit sources and opens up more accessible financing options for small enterprises.

Participants in TReDS
The TReDS platform involves three primary participants:

Sellers: MSMEs supplying goods or services.

Buyers: Corporates, including Government Departments and Public Sector Undertakings (PSUs), who procure goods or services from MSMEs.

Financiers: Banks, Non-Banking Financial Companies (NBFCs), and other financial institutions permitted by the RBI to offer financing on the platform.

Factoring Unit (FU)
An FU is a digital representation of a trade receivable, such as an invoice or bill of exchange, on the TReDS platform. It signifies a confirmed obligation of payment from the buyer to the seller.
Creation of FU
Both MSME sellers and buyers can create an FU:

Seller-Initiated FU: When the seller uploads the invoice, it's termed as factoring.

Buyer-Initiated FU: When the buyer initiates the process, it's referred to as reverse factoring.

How Trade Receivables Discounting System (TReDS) Works?
The Trade Receivables Discounting System (TReDS) is a digital platform that facilitates the financing of trade receivables for Micro, Small, and Medium Enterprises (MSMEs). It enables MSMEs to receive early payments against their invoices by allowing financiers to bid on these receivables. The process involves the following steps:

Creation of Factoring Unit (FU): The process begins with the creation of a Factoring Unit (FU), which is a digital representation of the invoice or bill of exchange. This FU is uploaded onto the TReDS platform by either the seller (in the case of factoring) or the buyer (in the case of reverse factoring), encapsulating all relevant transaction details.

Acceptance of FU: Once the FU is created, the counterparty—either the buyer or the seller, depending on who initiated the FU—reviews and accepts it. This acceptance confirms the authenticity of the transaction and the obligation to pay, making the FU eligible for financing.

Bidding by Financiers: After the FU is accepted, registered financiers on the TReDS platform are notified and can commence bidding. These financiers offer discount rates at which they are willing to finance the FU, creating a competitive environment that can lead to more favorable terms for the MSME seller.

Selection of Bid: The seller or buyer, depending on the arrangement, reviews the bids submitted by the financiers. They select the most suitable bid based on factors such as the discount rate and terms of financing, thereby finalizing the financier for the transaction.

Disbursement of Funds: Upon selection, the chosen financier disburses the discounted amount to the MSME seller's bank account. This transaction is typically completed promptly, often within the same or next working day, ensuring quick access to funds for the seller.

Repayment by Buyer: On the due date specified in the FU, the buyer remits the full invoice amount to the financier. This repayment settles the transaction, with the financier recovering the funds initially advanced to the seller.

Benefits Trade Receivables Discounting System (TReDS) for MSME Suppliers
The Trade Receivables Discounting System (TReDS) offers several advantages to Micro, Small, and Medium Enterprises (MSMEs), enhancing their financial stability and operational efficiency:

Enhanced Liquidity: TReDS facilitates quick access to funds by allowing MSMEs to convert their trade receivables into immediate cash. This improved liquidity enables businesses to manage their working capital more effectively, ensuring smooth day-to-day operations.

Reduced Credit Risk: Financing on the TReDS platform is conducted on a "without recourse" basis, meaning the financier assumes the risk of default. This arrangement protects MSME suppliers from potential payment defaults by buyers, providing greater financial security.

Competitive Financing Rates: TReDS operates as a transparent, auction-based platform where multiple financiers can bid to finance trade receivables. This competitive environment often results in better discount rates for MSMEs, reducing the cost of financing.

Operational Efficiency: The digital nature of TReDS streamlines the entire process of invoice discounting, reducing paperwork and administrative burdens. This efficiency allows MSMEs to focus more on their core business activities rather than on managing receivables.

Limitations of TReDS
While TReDS provides significant benefits, there are certain limitations that may impact its accessibility and adoption:

Eligibility Constraints: Currently, only MSMEs are eligible to register as sellers on the TReDS platform. This restriction excludes other small businesses that do not fall under the MSME category, limiting the platform's reach.

Mandatory Onboarding for Large Buyers: As per the Ministry of MSMEs notification dated November 7, 2024, all companies (like Private Limited Company, Limited Liability Partnership, Public Limited Company and One Person Company, etc.) registered under the Companies Act, 2013, with a turnover exceeding Rs.250 crore, and all Central Public Sector Enterprises (CPSEs), are mandated to onboard the TReDS platform by March 31, 2025. Non-compliance may lead to regulatory consequences.

Awareness and Adoption: Despite its advantages, the adoption of TReDS among MSMEs and large buyers remains limited. Factors such as lack of awareness, resistance to change, and unfamiliarity with digital platforms contribute to this slow uptake.

Online Registration Process on TReDS Portal
For Sellers (MSMEs)

Select a TReDS Platform: Choose from RBI-approved platforms such as RXIL, M1xchange, or Invoicemart, considering factors like user interface, service quality, and associated costs.

Fill Out the Application Form: Visit the chosen platform's official website and complete the online registration form with accurate business details.

Submit KYC Documents: Provide necessary documents, including:

PAN card

GST registration certificate

Bank account details

Authorized signatory identification

Board resolution authorizing participation

Execute Agreements: Sign the Master Agreement outlining the terms and conditions of participation on the TReDS platform.

Verification and Approval: The platform will review the submitted documents. Upon successful verification, login credentials will be provided.

Onboarding and Training: Attend any required training sessions or onboarding processes to familiarize with the platform's operations.

For Buyers and Financiers

Choose a TReDS Platform: Select an RBI-approved platform that aligns with your organization's requirements.

Obtain the Onboarding Kit: Request the onboarding kit from the platform, which includes necessary forms and instructions.

Complete KYC Formalities: Submit required documents such as:

Certificate of Incorporation

PAN and GST details

Board resolution authorizing participation

Authorized signatory identification

Recent financial statements.

Sign Agreements: Execute the Master Agreement detailing the roles, responsibilities, and terms of engagement on the platform.

Provide Bank Mandate: Submit a mandate form for debiting the designated bank account, facilitating seamless transactions.

Verification and Access: After document verification and approval, receive login credentials to access and operate on the TReDS platform.

Conclusion
TReDS stands as a transformative initiative by the RBI to support the financial health of MSMEs by ensuring timely payments and improved cash flows. By facilitating a transparent and efficient mechanism for trade receivables financing, TReDS plays an important role in strengthening the MSME sector, which is vital for India's economic growth.
Frequently Asked Questions (FAQs) for Trade Receivables Discounting System (TReDS)
Q1. Who can create an FU?
Ans. In TReDS, FU can be created either by the MSME seller or the buyer. If MSME seller creates it, the process is called factoring; if the same is created by corporates or other buyers, it is called as reverse factoring.
Q2. Whether TReDS could deal with reverse factoring?
Ans. Yes. The TReDS could deal with both receivables factoring as well as reverse factoring.
Q3. Whether the MSME seller would have to pay to the financier in case the buyer defaults in repayment?
Ans. No. The transactions processed under TReDS are “without recourse” to the MSMEs.
Q4. Whether any authorisation is required to set up and operate a TReDS platform?
Ans. Yes, authorisation is required to be obtained from RBI under the Payment and Settlement Systems (PSS) Act, 2007.

The full form of TReDS is Trade Receivables Discounting System, is an innovative digital platform introduced by the Reserve Bank of India (RBI) to facilitate the financing of trade receivables for Micro, Small, and Medium Enterprises (MSMEs). By enabling MSMEs to convert their receivables into liquid funds, TReDS addresses the critical issue of delayed payments, thereby enhancing their cash flow and operational efficiency.

RBI Notification and Guidelines for TReDS (Trade Receivables Discounting System)

The RBI issued the initial guidelines for TReDS on December 3, 2014, aiming to create a transparent and efficient mechanism for MSMEs to access working capital through the discounting of trade receivables. These guidelines were subsequently updated on July 2, 2018, to expand the scope and operational framework of TReDS. The system allows for the financing or discounting of MSME receivables on a "without recourse" basis by permitted financiers, ensuring that MSMEs are not burdened with the risk of default by buyers.

Purpose of TReDS

The Trade Receivables Discounting System (TReDS) was established to address the financial challenges faced by Micro, Small, and Medium Enterprises (MSMEs) due to delayed payments from buyers. By offering a digital platform for the financing of trade receivables, TReDS aims to enhance liquidity, reduce credit dependency, and streamline payment processes for MSMEs.

Receive Early Payments: MSMEs often encounter prolonged payment cycles, with receivables taking 60 to 90 days or more to materialize. TReDS enables these enterprises to receive payments promptly by allowing them to discount their trade receivables through multiple financiers. This mechanism ensures that MSMEs can convert their pending invoices into immediate cash, thereby mitigating the risks associated with payment delays.
Improve Cash Flow: Timely access to funds is crucial for the smooth operation of MSMEs. By facilitating early payments, TReDS significantly enhances the cash flow of these enterprises. Improved liquidity allows MSMEs to manage their working capital more effectively, invest in growth opportunities, and meet their operational expenses without resorting to high-interest loans.
Reduce Dependency on Traditional Credit: Traditional financing avenues often involve lengthy approval processes and stringent credit assessments, which can be challenging for MSMEs. TReDS offers an alternative by providing a platform where MSMEs can access funds based on the creditworthiness of their buyers rather than their own credit history. This shift reduces the reliance on conventional credit sources and opens up more accessible financing options for small enterprises.

Participants in TReDS

The TReDS platform involves three primary participants:

Sellers: MSMEs supplying goods or services.
Buyers: Corporates, including Government Departments and Public Sector Undertakings (PSUs), who procure goods or services from MSMEs.
Financiers: Banks, Non-Banking Financial Companies (NBFCs), and other financial institutions permitted by the RBI to offer financing on the platform.

Factoring Unit (FU)

An FU is a digital representation of a trade receivable, such as an invoice or bill of exchange, on the TReDS platform. It signifies a confirmed obligation of payment from the buyer to the seller.

Creation of FU

Both MSME sellers and buyers can create an FU:

Seller-Initiated FU: When the seller uploads the invoice, it's termed as factoring.
Buyer-Initiated FU: When the buyer initiates the process, it's referred to as reverse factoring.

How Trade Receivables Discounting System (TReDS) Works?

The Trade Receivables Discounting System (TReDS) is a digital platform that facilitates the financing of trade receivables for Micro, Small, and Medium Enterprises (MSMEs). It enables MSMEs to receive early payments against their invoices by allowing financiers to bid on these receivables. The process involves the following steps:

Creation of Factoring Unit (FU): The process begins with the creation of a Factoring Unit (FU), which is a digital representation of the invoice or bill of exchange. This FU is uploaded onto the TReDS platform by either the seller (in the case of factoring) or the buyer (in the case of reverse factoring), encapsulating all relevant transaction details.
Acceptance of FU: Once the FU is created, the counterparty—either the buyer or the seller, depending on who initiated the FU—reviews and accepts it. This acceptance confirms the authenticity of the transaction and the obligation to pay, making the FU eligible for financing.
Bidding by Financiers: After the FU is accepted, registered financiers on the TReDS platform are notified and can commence bidding. These financiers offer discount rates at which they are willing to finance the FU, creating a competitive environment that can lead to more favorable terms for the MSME seller.
Selection of Bid: The seller or buyer, depending on the arrangement, reviews the bids submitted by the financiers. They select the most suitable bid based on factors such as the discount rate and terms of financing, thereby finalizing the financier for the transaction.
Disbursement of Funds: Upon selection, the chosen financier disburses the discounted amount to the MSME seller's bank account. This transaction is typically completed promptly, often within the same or next working day, ensuring quick access to funds for the seller.
Repayment by Buyer: On the due date specified in the FU, the buyer remits the full invoice amount to the financier. This repayment settles the transaction, with the financier recovering the funds initially advanced to the seller.

Benefits Trade Receivables Discounting System (TReDS) for MSME Suppliers

The Trade Receivables Discounting System (TReDS) offers several advantages to Micro, Small, and Medium Enterprises (MSMEs), enhancing their financial stability and operational efficiency:

Enhanced Liquidity: TReDS facilitates quick access to funds by allowing MSMEs to convert their trade receivables into immediate cash. This improved liquidity enables businesses to manage their working capital more effectively, ensuring smooth day-to-day operations.
Reduced Credit Risk: Financing on the TReDS platform is conducted on a "without recourse" basis, meaning the financier assumes the risk of default. This arrangement protects MSME suppliers from potential payment defaults by buyers, providing greater financial security.
Competitive Financing Rates: TReDS operates as a transparent, auction-based platform where multiple financiers can bid to finance trade receivables. This competitive environment often results in better discount rates for MSMEs, reducing the cost of financing.
Operational Efficiency: The digital nature of TReDS streamlines the entire process of invoice discounting, reducing paperwork and administrative burdens. This efficiency allows MSMEs to focus more on their core business activities rather than on managing receivables.

Limitations of TReDS

While TReDS provides significant benefits, there are certain limitations that may impact its accessibility and adoption:

Eligibility Constraints: Currently, only MSMEs are eligible to register as sellers on the TReDS platform. This restriction excludes other small businesses that do not fall under the MSME category, limiting the platform's reach.
Mandatory Onboarding for Large Buyers: As per the Ministry of MSMEs notification dated November 7, 2024, all companies (like Private Limited Company, Limited Liability Partnership, Public Limited Company and One Person Company, etc.) registered under the Companies Act, 2013, with a turnover exceeding Rs.250 crore, and all Central Public Sector Enterprises (CPSEs), are mandated to onboard the TReDS platform by March 31, 2025. Non-compliance may lead to regulatory consequences.
Awareness and Adoption: Despite its advantages, the adoption of TReDS among MSMEs and large buyers remains limited. Factors such as lack of awareness, resistance to change, and unfamiliarity with digital platforms contribute to this slow uptake.

Online Registration Process on TReDS Portal

For Sellers (MSMEs)

Select a TReDS Platform: Choose from RBI-approved platforms such as RXIL, M1xchange, or Invoicemart, considering factors like user interface, service quality, and associated costs.
Fill Out the Application Form: Visit the chosen platform's official website and complete the online registration form with accurate business details.
Submit KYC Documents: Provide necessary documents, including:
- PAN card
- GST registration certificate
- Bank account details
- Authorized signatory identification
- Board resolution authorizing participation
Execute Agreements: Sign the Master Agreement outlining the terms and conditions of participation on the TReDS platform.
Verification and Approval: The platform will review the submitted documents. Upon successful verification, login credentials will be provided.
Onboarding and Training: Attend any required training sessions or onboarding processes to familiarize with the platform's operations.

For Buyers and Financiers

Choose a TReDS Platform: Select an RBI-approved platform that aligns with your organization's requirements.
Obtain the Onboarding Kit: Request the onboarding kit from the platform, which includes necessary forms and instructions.
Complete KYC Formalities: Submit required documents such as:
- Certificate of Incorporation
- PAN and GST details
- Board resolution authorizing participation
- Authorized signatory identification
- Recent financial statements.
Sign Agreements: Execute the Master Agreement detailing the roles, responsibilities, and terms of engagement on the platform.
Provide Bank Mandate: Submit a mandate form for debiting the designated bank account, facilitating seamless transactions.
Verification and Access: After document verification and approval, receive login credentials to access and operate on the TReDS platform.

Conclusion

TReDS stands as a transformative initiative by the RBI to support the financial health of MSMEs by ensuring timely payments and improved cash flows. By facilitating a transparent and efficient mechanism for trade receivables financing, TReDS plays an important role in strengthening the MSME sector, which is vital for India's economic growth.

Frequently Asked Questions (FAQs) for Trade Receivables Discounting System (TReDS)

Q1. Who can create an FU?

Ans. In TReDS, FU can be created either by the MSME seller or the buyer. If MSME seller creates it, the process is called factoring; if the same is created by corporates or other buyers, it is called as reverse factoring.

Q2. Whether TReDS could deal with reverse factoring?

Ans. Yes. The TReDS could deal with both receivables factoring as well as reverse factoring.

Q3. Whether the MSME seller would have to pay to the financier in case the buyer defaults in repayment?

Ans. No. The transactions processed under TReDS are “without recourse” to the MSMEs.

Q4. Whether any authorisation is required to set up and operate a TReDS platform?

Ans. Yes, authorisation is required to be obtained from RBI under the Payment and Settlement Systems (PSS) Act, 2007.