M1xchange facilitates financing of trade receivables of small firms

You drop in at any seminar or workshop deliberating on MSMEs (micro, small & medium enterprises) and one inevitable point that comes up for discussion is addressing the financing needs of the sector.

The MSME sector, which generates the most number of jobs after the agriculture sector, continues to face constraints in obtaining adequate finance, especially in terms of their ability to convert trade receivables into liquid funds.

For facilitating the financing of trade receivables of MSMEs from corporate buyers through multiple lenders, the Reserve Bank of India (RBI) has introduced the Trade Receivables Discounting System (TReDS).

M1xchange, run by Gurugram-based Mynd Solutions, is one of the three holders of TReDS licences issued by the RBI and acts as an exchange to facilitate the financing of trade receivables through ‘factoring’ or ‘invoice discounting’ by external financiers.

The company founded by Sundeep Mohindru has raised Series-A funding from Mayfield India and SIDBI Ventures for an undisclosed amount. It is for the first time that any TReDS platform has received PE funding. The other two TReDS licence holders are Invoicemart, owned by A.TREDS, a joint venture of Axis Bank and mjunction services, and Receivables Exchange of India (RXIL), a joint venture of the NSE and SIDBI (Small Industries Development Bank of India).

M1xchange founder Sundeep Mohindru

“The RBI and the government, through the TReDS, have created a highly innovative platform that will allow MSMEs to secure financing at the lowest possible cost. We are excited to partner with Sundeep and the entire team at M1xchange, which has emerged as the market leader in the TReDS space. This investment continues to be in line with our focus on the Fintech sector in India,” said Vikram Godse, managing partner, who will join the board of directors to represent Mayfield.

Earlier, the promoters and SIDBI Venture Capital Funds had invested Rs 25 crore in the start-up.

Product concept

The TReDS allows MSMEs to receive money upfront, which helps them resolve their collection-related and working capital issues. MSMEs seller, corporate buyers, banks and non-banking financial companies (NBFCs) are the direct participants in the TReDS.

“An MSME supplying goods and services to a large corporate has a receivable from that big company. The MSME can put its invoice on the M1xchange and the large corporate could choose to accept the invoice and pay on, say, the 45th day, as per the credit terms. The banks on the exchange will then bid to discount that invoice. Based on the best bid, the MSME will get instant payment from the financing bank. The corporate will make payment to the bank on the due date. The rate of interest MSME will get is based on the goodwill of the large corporate. In this process, banks are essentially taking credit risk on large corporates and not on MSMEs," says Mohindru.

Trading on the platform also helps banks in meeting their priority sector lending targets. The interest rate charged by banks on the discounted amount is around 9 per cent per annum, but it is negligible when calculated on pro-rata basis taking into account the number of days for repayment of the bills by large corporates.

Opportunities

The manual bill discounting market is estimated at Rs 30,000 crore or about $42,162 million a year. “The gap in funding for the MSME market is approximately Rs  4 trillion and it can be well-addressed by this product,” Mohindru says.

There have been multiple tailwinds for TReDS exchanges such as the Ministry of Finance mandating all PSUs to join the TReDS, qualification of advances under the TReDS as priority sector lending for all participating banks, consideration of the widening of the definition of MSMEs to the system more inclusive and the Prime Minister’s latest announcement that all corporates with a turnover exceeding Rs 500 crore must register on the TReDS.

On revenue streams, Mohindru, who is also CEO of M1xchange, says, “As the underlying entities are the same (MSMEs, government departments, PSUs and corporates as buyers), the TReDS platform can deal with both receivables factoring as well as reverse factoring. It charges a one-time registration fee from participants, along with a percentage of the transaction value as a transaction fee.”  The total volume of transactional value at M1xchange has gone past Rs 2,000 crore since it started operations in October 2017. It expects to break even in FY20.

Expert take

Akhil Handa, Head-Fintech & New Business Initiatives and Advisor to managing director and chief executive officer, Bank of Baroda

Focus on educating potential stakeholders

The TReDS platform provides a win-win situation to all its stakeholders — buyers, sellers and financiers. Being regulated by the RBI, it provides a lot of comfort to financiers and helps them embrace the platform and build a close working relationship. 

The platform helps financiers meet their PSL requirement, target “new to bank clients” and help MSMEs in better and faster access to liquidity. I like M1xchange’s workflows, systems and procedures driven on its TReDS platform. It gives confidence to lenders that the company is regulated by the RBI. One notable feature of this platform is that digital signature is a must for every transaction authorisation. This helps tighten the overall legal framework. As the transactions are increasing, it is important for M1xchange to keep working towards increasing the check on authenticity of transactions.

M1xchange also should spend more time informing and educating the potential stakeholders, especially large corporates and PSUs. If more corporates join this platform, all their vendors (MSMEs) are likely to follow the suit.