Sunday, August 16, 2020

Trade Receivables Discounting System: Why is it important

This piece appeared as an editorial opinion in the print edition of The Economic Times. The online version can be accessed here.

Most central public sector undertakings are reportedly absent on Trade Receivables Discounting System (TReDS), an online factoring platform that connects buyers, suppliers and financiers. This is unacceptable. The government must make all its arms and all public enterprises join TReDS to ease working capital shortage of micro, small and medium enterprises (MSMEs). Non-compliance should be made an offence, with the liability pegged on the CEO and the members of the board.

Views on this appear very strong and they are not without sufficient cause. Most MSMEs suffer on account of lack of adequate working capital. They seem to be perennially short of working capital as larger entities make them supply for credit and also do not pay them in time. Being at the lower end of the system, they do not have adequate bargaining power and there and cannot dictate terms. The larger players in the market determine market access and hence have control over cash flows of their supplier MSMEs.

Around 10,000 MSMEs and 1,300 buyers (with a turnover of over Rs 500 crore) are now registered on TReDS. The total value of bills discounted (read: dues settled over the platform) is estimated at around Rs 23,000 Crore. The volumes must rise, given that TReDS improves liquidity in the entire chain. A vendor just needs to upload to TReDS the invoice, which shows the sale of goods and services by the MSME to the buyer. The buyer authenticates the invoice.

 

The financial intermediary brings cash into the transaction depending on the credit worthiness of the buyer. Buyers need to complete due diligence with their banks or financial intermediaries in advance.

Multiple financiers bid to take over the receivable from the supplier, the interest rate reflecting the creditworthiness of the large company on which the invoice has been raised, rather than that of the smaller supplier. The settlement file shows how much a financier has to pay an MSME seller and how much a buyer owes the financier on a particular date and time, bringing in credit discipline.

Most large companies use their large market presence to deny timely payment to their vendors. A mandatory TReDS arrangement takes away the power of larger buyers and prevents bullying of MSMEs.

Delayed payments happen in the case of Governments as well State owned enterprises and hence they need to be essential participants in TReDS. These entities are even more difficult to deal with than large Private sector players. There is no reason why government departments such as the NHAI, Railways, CPSEs and SPSEs large buyers from MSMEs with hefty outstanding payments, should not be part of TReDS.

No comments:

Post a Comment

Labour Code: Major changes

  In 2019, the Central government proposed to replace 29 existing labour laws with four Labour Codes on wages, social security, ...