Incentives for MSMEs to boost factoring mkt, ease recovery of receivables

The package makes it a must for large corporate buyers to register on TReDS system, shifting the risk of paying the banks from the MSME to the corporate customer

A factoring market of Rs 35 billion, apart from a huge OTC bill discounting market, will get a boost from Prime Minister Narendra Modi’s announcement of a 12-point incentive package for micro, small and medium enterprises (MSMEs) last Friday.

The major incentives include interest rate subvention, which helps making credit facilities cheaper, but, more importantly, when these units sell goods, the new package makes the recovery of receivables, especially from large buyers, smooth. Modi had said “all companies with a turnover of more than Rs 5 billion must now be brought on the Trade Receivables e-Discounting System (TReDS) portal. Joining this portal will enable entrepreneurs to access credit from banks, based on their upcoming receivables”.

This is a big boost for online platforms like the Receivables Exchange of India, A.TReDS, and M1xchange. These platforms register companies and MSMEs, from which they procure goods. Financiers like banks and non-banking financing companies buy these receivables from small units on these platforms. The financiers collect money from buyer corporates.

Benefits to small and medium units are that they get money in advance and there is no risk of a buyer not paying on them, which is a big comfort.

Runa Baksi, managing director and chief executive officer, Receivables Exchange of India Ltd (RXIL), welcoming the PM’s announcement on TReDS registration becoming mandatory for corporates with a turnover more than Rs 5 billion, said, “With all large corporates on TReDS, MSMEs will benefit from a quicker realisation of receivables along with access to transparent, highly competitive financing rates and without recourse funding.”

TReDS is an online mechanism for facilitating the financing of trade receivables of MSMEs through multiple financiers. It also enables the discounting of invoices of MSME sellers, allowing them to reduce working capital needs. At present there are three online electronic platforms or exchanges offering these facilities. The online platforms are operating for over a year and now bills discounted by all the are around Rs 35 billion.

The rates at which bills are discounted are, on average, 8-9.5 per cent while for risky industries like real estate or low credit-rated companies they may be higher. Average discounting rates are 1-3 percentage points lower than traditional discounting bills of MSMEs by banks.

The package also includes a fund for technological upgrade, which will open tool rooms across the country, and 20 hubs will be formed and 100 spokes in the form of tool rooms will be established at an investment of Rs 60 billion.

Amar Shankar, partner, Government Sector - MSME Sector Development, EY, says, “Having 100 new extension centres will be a game changer. This will improve access to technology for MSMEs at the bottom of the pyramid. These common facilities will provide common technology infrastructure facilities along with support for incubation and entrepreneurship development. This will provide comprehensive solutions to the technological needs of MSMEs across a range of sectors including emerging technologies like IoT, Automation, Artificial Intelligence, Blockchain, and Robotics.”

However, experts suggest the government walk the extra mile. Kalyan Basu, managing director and chief executive officer of A.TReDs, the largest TReDS platform by volume, said “it is time providing access to credit guarantee for financiers on the funds disbursed through TReDS exchanges. The credit guarantee will further help in reducing the interest rates extended to MSMEs on the TReDS exchanges and allow for even more favourable terms of credit.” He also proposed to allow non-MSME players to transact on the platform, which will expand the market for TReDS as well as improve the ease of business.