RBI Trade Guideline for MSMEs on Trade Receivables Discounting System (TReDS)


RBI understands that micro, small and medium enterprises have and still do, play an important role in the country’s economic development. However, such institutions still do suffer from the lack of finances, or to be more specific to get finances at all. They require funds and loans to convert trade receivables to liquid funds for various ventures. Thus, their business suffers from a lack of it. To address this problem throughout the country, RBI is setting up a mechanism for giving finance for trade receivables. It has already published a paper called Micro, Small and Medium Factoring Trade Receivables Exchange.
Below given are the guidelines for setting up and for operating the system.
1.       This scheme, which shall be set up and shall operate for the purpose of facilitating finance of trade receivables of MSMEs from the corporate buyers through channels, will henceforth be known as Trade Receivables Discounting System or TReDs.
2.       The TReDS shall therefore facilitate the discounting of bills of exchange and invoices. As the entities are the same in both cases, the system is able to deal with receivables factoring along with reverse factoring so as to facilitate higher transaction volumes and better pricing.

Participants

1.       The participants in this scheme or system shall be MSME sellers, financiers and corporate buyers. Financiers include NBFCs and banks alike, and they shall be direct participants in the TReDS system. This system shall provide a platform for facilitating accepting, uploading, discounting and settlements of bills of MSMEs, invoices, etc. The corporate buyers and bankers may have access to the system when it is deemed necessary, for getting information of various portfolios like bills and discounted invoices of clients. The TReDS will be tying up with technologies as needed.

Process flow

1.       The objective of the TReDS system is to facilitate the financing of bills of MSMEs and bills of exchange that are drawn on corporate buyers by way of discounting by financiers. To this end, the system has put suitable mechanisms in place by which invoice and bills are converted into factoring units.
2.       In the very first phase, the system shall aid in the facilitation of discounting of the factoring units by financiers, thereby resulting in the flow of funds to the MSMEs with the final payment of factoring units made on due date by a corporate buyer. In the second phase, the system shall enable discounting and rediscounting of the factoring units.
3.       The TReDs system’s process flow is there to enable the minimum uploading of bills of creation and invoices of factoring units by MSME sellers. This includes acceptance by corporate purchasers, rating, re-discounting, discounting etc, of factoring units, providing notifications to each party that are relevant to the transaction, reporting the MSME requirements, and lastly the generation and submission of obligation settlements.
4.       The TReDS may from time to time introduce random audits to make sure there is no window dressing, and that factoring units uploaded on exchange are completely authentic, and that these are based on genuine transactions.
5.       The TReDs system shall introduce a standard mechanism process for the on-boarding of buyers and sellers on the system. This process shall require all parties to submit their KYC documents to the TReDS, along with resolutions related to authorize corporate personnel buyers and MSME sellers. They shall be given IDs and passwords for multi-level authorizations.
6.       The KYC documentation process can be simplified because it needs confirmation of the MSME seller’s banker, or of the corporate buyer, as the case may be.
7.       The participants shall have a one-time agreement only.
8.       The master agreement between the two parties shall include the buyer’s obligation to pay back on the due date as soon as the factoring unit is accepted online, that there shall be no disputes on the quality of goods, and that set-offs are not allowed.
9.       The master agreement shall state the terms and conditions, and shall have a declaration by the seller that any finance received through the system shall not be taken as a part of an existing charge or hypothecation Working Capital Bankers. An NOC may be needed as well to avoid double-financing.
10.   In case the financing is based on invoices, and agreement will be executed by the two parties.
11.   All agreements shall be in custody of the TReDS.
12.   The TReDS system shall review the need for CERSAI registration for all assignments, and it will therefore put mechanisms in place for the same purpose.

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