| September 01
How India is evolving? M1xchange-TReDS a new Norm for SME/MSME Digitalization of Invoice Discounting In India
M1xchange TReDS is an online exchange being set up under the approval of Reserve Bank
of India (RBI) to facilitate the discounting of invoices and bills of exchange on a PAN India
TReDS is an electronic platform for facilitating the financing / discounting of trade
receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers.
These receivables can be due from corporates and other buyers, including Government
Departments and Public Sector Undertakings (PSUs).
Key participants in TReDS are Micro, Small & Medium Enterprises “MSME” (Suppliers), large
Corporates including PSUs and Govt. Departments (Buyers) and Banks/NBFCs (Financiers).
M1xchange aims to provide MSMEs Supply chain related cash flow finance at competitive
rates through an open bid process via multiple financiers. Financing on M1xchange is
“Without Recourse” to the MSME supplier as per RBI guidelines. M1xchange employs the
latest technologies to ensure the authenticity of the underlying transactions.
The exchange enables MSME to secure finances by converting their trade receivables into
liquid funds, on without recourse basis. The exchange has hosted Nationalised, Private and
Foreign banks to finance these receivables at most competitive rates with a unique model of
bidding by the banks.
How it works
This Facility allows suppliers with outstanding short-term invoices mostly vis-àvis multiple buyers to
sell their receivables to a financial provider at a discount. This instrument is usually reserved to
“investment-grade” suppliers that have a minimum credit rating. Because of this, the finance
provider can offer this program on a full or partly “without recourse” basis; i.e., the supplier can
remove the accounts receivables completely or partly from its balance sheet, and the finance
provider bears the risk in case the buyers fail to perform their payments.
A trade credit insurance
can limit the risk exposure of the finance provider. This financing transaction between the supplier
and a finance provider can be made with or without the knowledge of the buyers; and depending on
the situation in some cases, the buyers may be asked to validate their accounts payables. At
maturity, the buyers pay the amounts of the invoices into the bank account (i) of the supplier, with
limited access rights of the supplier; (ii) of the finance provider (the finance provider does not have
to be a bank); or (iii) of the supplier without restriction.
The latter one adding an additional element
of risk for the finance provider. The buyer benefits from extended credit terms in a stable supply
chain environment. The supplier profits from increased short-term liquidity. And the finance
provider provides services in a relatively stable non speculative financial environment.