The Trade Receivables Discounting System, known as TReDS, is a business setup in which the micro, small, and medium enterprises (MSMEs) can apply for credit more easily than the traditional loans.
It is an electronic platform that allows auctioning of trade receivable. The process is also commonly known as ‘bills discounting’, a financier (typically a bank) buying a bill (trade receivable) from a seller of goods before it’s due or before the buyer credits the value of the bill. In other words, a seller gets credit against a bill which is due to him at a later date. The discount is the interest paid to the financier.
A bank gets payment security from the invoice as they know the amount that’s to be paid by the person whose name is on the invoice.
There are three main participants in TReDS:
On the TReDS platform, all three participants are able to come together and facilitate the uploading, accepting, and processing of the invoices for financing and discounting.
As per the RBI guidelines, only MSMEs are allowed to participate in the system as sellers. Non-Banking Financial Companies (NBFC) and Banks can join only as the financers.
An MSME seller who seeks funding, can upload an invoice on the platform. A buyer can then accept it upon which it becomes a factoring unit. This factoring unit then goes to auction. This is where the financiers (Banks or NBFCs) come in and offer their discount rate.
Note: A discount rate is the minimum interest rate that a financer can offer. It is also known as the marginal cost of funds-based lending rate (MCLR) which is set by the RBI.
The seller can then accept the discounting rate they are comfortable with. TReDS then facilitates the deal by debiting the financer and transferring the amount to the seller.
TReDS is an institutional system set up so as to encourage the financing of trade receivables of MSMEs from corporate purchasers through receipt financing by various agents. This progression is regarded to increase the trade debt claim the executives of the smaller scale small and medium endeavors.
MSMEs, in spite of their critical job in the Indian economy, keep on confronting imperatives in getting sufficient back, especially in their capacity to change over trade receivables into fluid assets.
Central Government train organizations with a turnover of more than Rs. 500 crore and all Central Open Area Endeavors to get themselves on boarded on Trade Receivables Discounting System stage