Trade Receivables Discounting System (TReDS)
About TReDS
TReDS is an electronic platform for online discounting of bills of MSMEs for supplies to large Corporates. It
addresses the issue of delayed payments to MSMEs.
• Reserve Bank of India granted “in-principle” approval to the following three applicants to set up
and operate Trade Receivables Discounting System (TReDS) as per the Guidelines issued on
December 03, 2014 under the Payment and Settlement System (PSS) Act 2007.
1. NSE Strategic Investment Corporation Limited (NSICL) and Small Industries Development
Bank of India (SIDBI), Mumbai - India's first TReDS exchange platform, Receivables Exchange
of India Limited (RXIL) is a joint venture promoted by SIDBI – the apex financial institution
for the promotion and financing of MSMEs in India, and the NSE – the premier stock
exchange in India.
2. Axis Bank Limited, Mumbai – A joint venture between Axis Bank and mjunction services ltd.,
owns and operates Invoicemart.
3. Mynd Solutions Pvt. Ltd., Gurgaon, Haryana – Platform Name - M1xchange.
• TReDS enables the MSMEs in securing financial assistance digitally at competitive terms and
without any collateral security, based on the invoices / bills for supplies to large corporates. This
also improves the liquidity for MSMEs resulting in better cashflow management.
Scheme
1. The TReDS will facilitate the discounting of both invoices as well as bills of exchange.
2. TReDS could deal with both receivables factoring as well as reverse factoring so that higher
transaction volumes come into the system and facilitate better pricing.
3. The transactions processed under TReDS will be “without recourse” to the MSMEs.
Prepared by: Raman Luthra
Chartered Accountant
Definitions
1. Factoring unit - a standard nomenclature used in the TReDS for an invoice or a bill on the system.
Factoring Units may be created either by the MSME seller (in the case of factoring) or by corporate
and other buyers.
2. Financier – refers to banks, NBFC Factors and other financial institutions as permitted by the
Reserve Bank of India participating in the TReDS and accepting the factoring unit for financing
purpose.
Participants
1. MSME sellers, corporate and other buyers, including the Government Departments and PSUs, and
financiers (banks, NBFC Factors and other financial institutions as permitted by the Reserve Bank of
India) will be direct participants in the TReDS.
Process flow and procedure
1. In the first phase, the TReDS would facilitate the discounting of these factoring units by the
financiers resulting in flow of funds to the MSME with final payment of the factoring unit being
made by the buyer to the financier on due date.
2. In the second phase, the TReDS would enable further discounting / re-discounting of the
discounted factoring units by the financiers, thus resulting in its assignment in favour of other
financiers
3. The process flow of the TReDS has to enable at the minimum, the uploading of invoices/bills and
creation of factoring units by the MSME sellers; its acceptance by the corporate and other buyers,
including the Government Departments and PSUs, within a specified time limit; discounting, rating
and re-discounting of factoring units; sending of notifications at each stage to the relevant parties
to the transaction; reporting and MIS requirements; and finally, generation and submission of
settlement of obligations. In case of reverse factoring, the buyer could also create factoring units
based on the documents uploaded by the MSME seller
4. The TReDS may also undertake some random audits to ensure that the factoring units uploaded on
the exchange are authentic & based on genuine underlying transactions involving the sale of goods
or services.
5. TReDS would put in place a standardized mechanism / process for on-boarding of buyers and
sellers on the TReDS. This one-time on-boarding process will require the entities to submit all KYC
related documents to the TReDS, along with resolutions / documents specific to authorised
personnel of the buyer, and the MSME seller. Such authorised personnel would be provided with
IDs / Passwords for TReDS authorisations (multi-level). Indemnity in favour of TReDS, if required,
may also be given if it is made part of the standardized on-boarding process.
Prepared by: Raman Luthra
Chartered Accountant
Settlement process
1. Critical to the operations of the TReDS is the mechanism that ensures timely settlement of funds
between the member financiers and the MSME sellers and the subsequent settlement of funds
between the member buyers and the respective financiers on due date of the factoring unit.
In order to ensure a smooth process of such payments, the TReDS would be required to:
a) Trigger settlement between financier and MSME for accepted bids - In respect of all
factoring units financed on a given day, the TReDS will generate the payment obligations of
all financiers on T+2 basis and send the file for settlement in any of the existing payment
system as agreed among the system participants. The TReDS would have to put in place a
separate recourse mechanism to handle settlement failures in respective payment systems.
b) Trigger settlement between the buyer and the ultimate financier on due date - the TReDS
would generate the payment obligations file and send the same for settlement on DUE
DATE to the relevant payment system.
2. The TReDS will generate the settlement files and send the same to existing payment systems for
actual payment of funds. This would ensure that the inter-bank settlement (between the bankers
representing member MSMEs, buyers and the financiers) will take place and defaults, if any, by the
buyers will be handled by the buyer’s bank and will not be the responsibility of the TReDS. Hence,
the settlement process ensures payments to relevant recipients on due date, thus, facilitating the
smooth operations on the TReDS. However, it would not entail a guaranteed settlement by the
TReDS
3. The TReDS would be required to put in place a mechanism for bankers to report defaults in
payments by buyers. The TReDS would also need to ensure adequate arbitration and grievances
redressal mechanism is in place.
Eligibility criteria to set up and operate the TReDS
1. Entities desirous of setting up and operating the TReDS should fulfil the following criteria
a) Financial Criteria
i. Since the TReDS will not be allowed to assume any credit risk, its minimum paid up
equity capital shall be Rs. 25 crores.
ii. Entities, other than the promoters, will not be permitted to have shareholding in excess
of 10 per cent of the equity capital of the TReDS.
iii. The overall FINANCIAL STRENGTH of the promoters/entity seeking to set up TReDS
would be an important criterion of assessment/selection.
Prepared by: Raman Luthra
Chartered Accountant
b) Due diligence of promoters
The entities and their promoters/promoter groups as defined in the SEBI (Issue of Capital &
Disclosure Requirements) Regulations, 2009 should be ‘fit and proper’ in order to be eligible to
operate as TReDS. RBI would assess the ‘fit and proper’ status of the applicants on the basis of
their past record of sound credentials and integrity; financial soundness and track record of at
least 5 years in running their businesses. RBI may, inter alia, seek feedback on the applicants on
these or any other relevant aspects from other regulators, and enforcement and investigative
agencies like Income Tax, CBI, Enforcement Directorate, SEBI, etc. as deemed appropriate.
c) Technological capability
The TReDS should have sound technological basis to support its operations. As such, the TReDS
should, at the minimum, fulfil the following technological requirements.
➢ TReDS shall be able to provide electronic platform for all the participants.
➢ Information about bills/ invoices, discounting and quotes shall be disseminated by the
TReDS in real time basis, supported by a robust MIS system.
➢ The TReDS shall have a suitable Business Continuity Plan (BCP) including a disaster
recovery site.
➢ The TReDS shall have an online surveillance capability which monitors positions, prices
and volumes in real time so as to check system manipulation
RBI Expanded the Scope of Trade Receivables Discounting System 9 June 7, 2023
1. Facilitate insurance for transactions: Financiers place their bids on the TReDS platforms keeping in
view the credit rating of buyers. They are generally not inclined to bid for payables of low rated
buyers. To overcome this, insurance facility is being permitted for TReDS transactions, which would
aid financiers to hedge default risks, subject to the following:
i. Apart from MSME sellers, buyers and financiers, insurance companies are permitted to
participate as “fourth participant” in TReDS.
ii. In their business / operational rules, the TReDS platform operators may specify the stage at
which insurance facility can be availed.
iii. Premium for insurance shall not be levied on the MSME seller.
iv. Collection of premium and related activities could be enabled through National Automated
Clearing House (NACH) system used for settlement of TReDS transactions.
v. Based on consent received from financiers and insurance companies, TReDS platforms could
facilitate automated processing of insurance claims and specify timelines for their
settlement through the NACH system.
vi. As of now, the credit insurance shall not be treated as a Credit Risk Mitigant (CRM) to avail
any prudential benefits.
Prepared by: Raman Luthra
Chartered Accountant
2. Expand the pool of financiers: TReDS transactions fall under the ambit of “factoring business”, and
banks, NBFC-Factors and other financial institutions (as permitted by RBI) can presently
participate as financiers in TReDS. The Factoring Regulation Act, 2011 (FRA) allows certain other
entities / institutions to undertake factoring transactions. Accordingly, all entities / institutions
allowed to undertake factoring business under FRA and the rules / regulations made thereunder,
are NOW PERMITTED to participate as financiers in TReDS. This would augment availability of
financiers on TReDS platforms.
3. Enable secondary market for Factoring Units (FUs) : TReDS guidelines provide for the discounted /
financed FUs to have a secondary market, which is, however, not introduced yet. Given the
experience gained, TReDS platform operators may, at their discretion, enable a secondary market
for transfer of FUs within the same TReDS platform
4. Settlement of FUs not discounted / financed: On an average, 17% of FUs uploaded on TReDS
platforms are not discounted / financed; for such FUs, TReDS guidelines require buyers to pay
MSME sellers outside the system. To overcome the inconvenience caused to MSME sellers and
buyers as well as for better reconciliation, TReDS platform operators shall now be permitted to
undertake settlement of all FUs – financed / discounted or otherwise – using the NACH
mechanism used for TReDS
5. Display of bids: TReDS platforms facilitate transparent and competitive bidding by the financiers.
To make the process more transparent, the platforms may display details of bids placed for an FU
to other bidders; name of the bidder shall, however, not be revealed.
MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES NOTIFICATION
All companies registered under the Companies Act, 2013 (18 of 2013) with a turnover of more than Rs. 250
crore (two hundred and fifty crore rupees) and all Central Public Sector Enterprises shall be required to get
themselves onboarded on the Trade Receivables Discounting System platforms, set up as per the
notification of the Reserve Bank of India.
The onboarding process on the Trade Receivables Discounting System platforms shall be completed by 31st
March, 2025.
Prepared by: Raman Luthra
Chartered Accountant
