To address the financing concerns faced by SMEs who contribute significantly to the Indian economy, RBI in discussion with the various stakeholders introduced an institutional mechanism for financing trade receivable in 2014. And as per the definition laid down by the RBI, the scheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate buyers through multiple financiers will be known as Trade Receivables Discounting System (TReDS).
The system shall enable the discounting of both invoices and bills of exchange.
To enable a better understanding for a laymen, by means of the digital platform which discounts bill, banks extend credit line to vendors who in general belong to the SME category for their supplies to the corporate. After the process is executed, vendor is required to submit the invoice copy on the platform. Later, verification is to be done from the end of corporate and on acceptance of the same invoice by the large corporate, it is at the discretion of the banks to decide an interest rate for discounting the bill of exchange or invoice.
The mechanism has been taken on a full swing only recently by M1 exchange, an online exchange set up after the RBI approved of the TReDS facility for discounting invoice and bills of exchange.
How SME Benefits?
The electronic trading platform such as the M1 exchange would smoothen as well as hasten the process of funding the SMEs which has been reeling under huge liquidity concerns.
The discounting of the receivables by the SMEs to either banks or factoring firms would enable them to realize funds at an earlier date which they will otherwise at later point in time.