Banking Panel Considers TReDS Invoice Securitisation to Enhance MSME Cash Flow

Government Seeks Framework to Enhance Credit Access for MSMEs

A high-level banking committee is set to deliberate on creating a framework to facilitate the securitisation of receivables for micro, small, and medium enterprises (MSMEs), according to government officials. The committee, comprising representatives from the Reserve Bank of India, Department of Financial Services, Ministry of MSMEs, and markets regulator Sebi, aims to address the issue of delayed payments faced by MSMEs.

The proposed framework is designed to make capital readily available for MSMEs by enabling them to raise funds through the securitisation of their receivables. To achieve this, the government is exploring the possibility of expanding the Trade Receivables Discounting System (TReDS), an online platform that facilitates the financing of trade receivables for MSMEs.

Improving TReDS: A Key Component of the Framework

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TReDS is an online platform that enables MSMEs to auction their trade receivables (invoices) to various financiers, such as banks and non-banking financial companies (NBFCs). Through TReDS, MSMEs receive payment immediately at a discount, which would otherwise typically take 90 days to come directly from the buyer. However, the platform currently does not allow pooling invoices for sale to institutional investors.

Comparison of TReDS Benefits

The government has identified a key challenge in the current TReDS system: many invoices of smaller values, below Rs 5 lakh, do not find many financers. To address this issue, the proposed framework aims to create a credible framework for securitisation and trading of SME receivables.

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Expanding Credit Access for MSMEs

If regulators can create a credible framework for securitisation and trading of SME receivables, it can significantly expand credit access for small businesses and reduce excessive dependence on bank balance sheets. The officials believe that this framework will require coordination among the RBI, SEBI, TReDS platforms, rating agencies, banks, and institutional investors. Key areas being worked out carefully include pooling norms, credit enhancement, disclosures, and investor eligibility.

The proposed framework is part of the broader remit of the High-Level Committee on Banking, which is also examining the expansion of the securitisation of corporate bond issuances by SMEs. The committee's deliberations are expected to address the bigger question of how India wants to build a broader credit ecosystem for small enterprises.