TReDS will help improve cash flows of MSMEs

Hyderabad: Delayed payments are a challenge for MSMEs. Ketan Gaikwad, Managing Director and CEO, Receivables Exchange of India Limited (RXIL) explains to Telangana Today how TReDS platform improves cash flows of sellers or suppliers in the MSME segment. What is RXIL? RXIL is a joint venture between Small Industries Development Bank of India (SIDBI), the […]

Hyderabad: Delayed payments are a challenge for MSMEs. Ketan Gaikwad, Managing Director and CEO, Receivables Exchange of India Limited (RXIL) explains to Telangana Today how TReDS platform improves cash flows of sellers or suppliers in the MSME segment.

What is RXIL?

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RXIL is a joint venture between Small Industries Development Bank of India (SIDBI), the apex financial institution for promotion and financing of MSMEs, and the National Stock Exchange of India, the premier stock exchange in India. RXIL is the first entity to receive approval from RBI in December 2016 to launch TReDS Exchange.

Position of sellers

Once goods have been delivered, sellers raise invoices on buyers. They pay GST and everything. They are virtually at the mercy of buyers to make the payments. There might be some on time payments. But in many cases, buyers use MSMEs as their bankers and try to stretch the payment cycles as long as they can, sometimes even going past the agreed timelines. Suppliers have a little say as they survive by supplying goods.

Invoice discounting

The buyer, seller and the financier have to register on the platform. Once goods are supplied, the suppliers upload the invoices to the TReDS. These invoices have to be accepted by the buyers. Once accepted, it is binding on buyers to make the payment at agreed schedules. Sometimes, goods may not match the specifications or may be of a different quality. Buyers use this and bargain on the price to be paid in the normal cases. However, buyers on the TReDS platform cannot change the amount citing these. These have to be dealt outside the platform. Under the tripartite agreement, the financiers pay the amount due to sellers. Since, sellers get the amount without waiting for the usual 45-day period, they give a discount on the bill. The discounted amount is the margin that financiers get. The financiers then collect the amount from buyers as per schedule.

Recourse

In normal scenarios, the sellers get credit based on the receivables they have. If buyers do not pay on time, the financers deduct this from the suppliers’ account. In TREDs, money is paid to the supplier without recourse and without collateral. It means if buyers default on payments, the banks or financers cannot ask the suppliers to repay the amount. Since multiple bankers bid for invoices, the suppliers get a better deal in terms of rate of interest. It is about 4.5% to 5%. This is lower compared to the about 10% they pay on other loans they take. This is the primary advantage of being on TReDS. They can use that to liquidate high priced loans, take fresh orders and start production. This improves production or service efficiency of sellers. Basically, the suppliers have ready cash.

Cost

Financiers make upfront payments to the suppliers after deducting interest. The interest corresponds to the time period agreed by the buyers to pay. Suppliers bear this interest and get faster payments. Many MSMEs depend on loans for executing fresh orders.

Plans for Telangana

While TReDS is open for all manufacturing and service segments, we will focus on infra and pharma sector MSMEs in Telangana. We will also reach out to the State Government to be part of the platform.