Ketan Gaikwad
MSMEs provide employment to over 11 crore Indians and is the second largest employer as a sector after agriculture. Strengthening MSMEs and enabling them to stay afloat during and after this pandemic is the need of the hour.
To start with, MSMEs need help with their most common and historic problem of access to ready and timely cash for payment of various expenses, employees’ salaries, and procurement of raw materials. India’s MSMEs are always constrained when it comes to cash on hand or liquidity of their receivables, as on an average, as per an Economic Times article, 60% of the MSMEs money is blocked into receivables which gets realised much later than the stipulated time of 45 days as per the MSMED Act.
According to a survey done by a leading publication, out of the MSMEs surveyed, only 10% among them got their payments within 45 days and 44% said the payments were unpredictable. The need has been to reduce this unpredictability and ensure a smoother working capital cycle so that MSMEs can carry out their business without disruption and focus their resources on improving the quality of their products and services.
TReDS enables MSMEs to get funds against their receivables within 45 days as per the MSMED Act and unlock the cash stuck in their supply chains.
How does TReDS enable MSME financing?
Trade Receivables Exchange and Discounting System (TReDS) was conceptualized to offer institutional support to MSMEs by discounting their invoices through a transparent online bidding mechanism. The initiative was aimed to institutionalize access to credit and enable formalisation of MSMEs.
TReDS is a completely digital platform connecting MSME sellers, buyers, and financiers. MSMEs registered on TReDS can upload their invoices drawn on their buyers registered with the platform and post-acceptance by their buyers obtain funds within 48 hrs, at an average interest rate as low as 8% per annum. The financing is without recourse to the MSME and sans collateral and is not a borrowing on the MSMEs books.
The journey so far and the challenges faced
Since 2017, TReDS has enabled over 14,000 MSMEs to receive payment worth INR 24,000 crores, allowing them to have better liquidity and access to funds on favourable terms. However, considering the vast number of MSMEs across the country, TReDS registrations need to be carried out on a war footing if India’s MSMEs are to unlock the benefits of trade receivables during the current economic environment.
A major challenge, though, is the fact that the buyers of these MSMEs need to be also registered on the respective TReDS platform and accept the invoices on the platform
Where does TReDS fit in the current economic scenario?
According to the Union Minister of MSMEs, MSMEs collectively are yet to receive over 5 lakh crore in outstanding payments from the central government, state government, PSUs, and the private sector, a sum that amounts to nearly 2.5 % of India’s GDP.
TReDS has the potential to transform this amount into an immense source of liquidity, because MSMEs account for nearly 1/3rd of India’s total economic output, leveraging TReDS to infuse them with liquidity could act as a multiplier, magnifying the impact of the government’s 20-lakh crore stimulus package for the economy on the whole.
Long-term post-COVID opportunities
Bringing MSMEs into the formal finance ecosystem is a challenge due to their unavailable credit history and balance sheet based lending by banking system. Indian MSMEs have long shied away from the formal financial ecosystem due to these challenges as many of them operate as a sole proprietor and prefer remaining informal due to the compliance burden.
Nine out of ten Indian MSMEs depend on credit from informal channels where interest rates charged are as high as 36% per annum. The COVID-19 crisis forces us to address the question of how MSMEs can access formal credit on favourable terms.
Leveraging TReDS has a twofold impact: One, MSMEs would gain access to instant liquidity. Second, by bringing thousands of MSMEs into the formal credit ecosystem through a convenient registration process, TReDS can facilitate a systematic push towards formalizing them.
The pandemic has left us with hard earned lessons and the business which were attuned to the use of digital channels have been able to recover faster than the others. In our experience too, the MSMEs who are part of our platform have been relatively cushioned from the harsh impact of the pandemic and have restored their production. We have seen our throughput cross the pre-COVID levels and continues to see an upward trend.
By unlocking the potential of lakhs of crores of trade receivables, TReDS can provide easier access to working capital, thus save India’s vulnerable small businesses, and propel the nation towards self-reliance in the months and years to come. TReDS not only offers MSMEs various benefits but also offers a win-win proposition to all three constituents vis buyers, sellers and financiers.
