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Change in Factoring Regulation in the offing

Govt keen to encourage seamless finance for MSME

New Delhi, December 4, 2019: Caught between a slowing economy and sticky rate of job creation, the Union Government has put focus on rejuvenating the MSME (Micro, Small and Medium Enterprises) sector in kick starting the sagging growth rate. In one such measure the Government will soon amend the Factoring Regulation Act 2011.

Two teething troubles which MSMEs face are timely availability of credit and collecting payments on time. Of the 6.34 crore MSMEs in the country, only about 8 per cent are served by formal credit channels. In order to support MSMEs, which are the lifeline of our economy, the Government has put emphasis on use of the Trade Receivables Discounting System Platform (TReDS).

In 2014, RBI introduced the concept of TReDS, a mechanism of trade receivables financing for MSMEs on a secure and digital platform. TReDS is an online mechanism for facilitating the financing of trade receivables of MSMEs through multiple financiers. It also enables discounting of invoices of MSME sellers raised against large corporate, allowing them to reduce working capital needs. “With receivables being one of the biggest problems of MSMEs, TReDS platforms approved by the RBI have done business worth Rs 12000 crores. About 7,000 MSME vendors have digitally availed collateral-free receivables finance at competitive rates from almost the entire banking sector during the short period of the existence of TReDS platforms,” said Sundeep Mohindru, CEO, M1xchange.

Providing reliable access to efficient formal credit to MSMEs has long been challenging for banks due to multiple factors such as (a) inadequate formal data for credit assessment (b) the lack of tailor-made products to suit the borrower and lender risk profiles (c) long turn-around times for granting loans, (d) the requirement of collateral, guarantees, etc.

TReDS platforms like M1xchange have emerged as a much needed elixir for MSMEs in discounting their bills and generating finance to execute their orders. For lenders, too, the platform provides a safe option of lending to MSMEs since the bills are drawn on large corporates with strong credit rating. The transparent process weeds out any chance of dubious transactions being funded, a major problem for banks.

TReDS platforms, in a short existence, have emerged as an important tool for the MSMEs to raise finances. In the short two plus years, the platforms have grown multi fold, touching Rs 12,000 crore worth transactions. M1xchange, the only platform not set up by banks, has been successful in bringing in large PSUs like India Oil, HPCL, BPCL, ONGC Videsh, NTPC, GAIL a total of 36 PSUs have been on-boarded and about 9 have joined M1xchange in the last quarter. This apart it has on boarded 31 banks from across the country along with a large number of MSMEs from across the country. The complete digitalised platform, which does due diligence of the participating MSMEs carefully, has emerged as among the fastest platforms to close transactions.

The Government has taken several steps to popularise the use of TReDS platforms. The most recent one is relaxation of norms for NBFCs (Non-banking Finance Companies) to participate in the platform. Market insights show, that over the last decade, NBFCs are playing an important role in providing credit to MSMEs especially at the lower end. Well established regional players with in-depth knowledge of micro markets and low-cost distribution provide access to credit to MSMEs beyond the tier I cities. To bring more cash liquidity on TReDS, NBFCs need to be allowed on the platform. For this an amendment of the Factoring Regulation Act, 2011 is necessary. It is expected that the same will be done in the current winter session of the Parliament. Earlier the Government instructed all companies with a turnover of Rs 500 crore or more to join the TReDS platforms so that MSMEs supplying goods and services to large corporates can access the benefits of quick and easy funding through the platform.

According to Sundeep Mohindru, CEO of M1xchange “TReDS platform is the future for the MSME sector in terms of job creation and in terms of economic value addition it can be an invaluable lifeline for cash-starved businesses to grow steadily. Large corporates too acknowledge benefits of technology and embrace the platform as it helps to bring down the cost of doing business for their supplier and in turn the efficiency is passed on to the large corporate. M1xchange works with Businesses to make them more competitive.”

About Mahender Bansal

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