Aatmanirbhar Bharat, after the announcement by Prime minister Narendra Modi and the 20K simulation package, all eyes are on MSMEs. Border tensions with china have given extra mile importance to it. The performance of MSME’s is going to be a key role in economic growth and countries dream to be self-reliant. 10% of the declared simulation packages are for the MSME’s to improve the liquidity through priority sector lending via banks with a government guarantee. The scheme is mainly to help to find out the working capital for units. But unfortunately, the loan offers are not getting a good response from the industry, even for a one-year moratorium on repayment of the loans.
MSMEs are stuck due to longer payment receivable cycle and bad debts. Assurance for payment on the goods and services supplied on a reasonable time is sufficient to give confidence to industries. Today, unfortunately, that is not there in our country. There are sufficient laws to assure this but nothing is effective. MSME act Chapter 5 from section 15 to 23 included with an intention to help MSME on receivables. Section 15 stated that “Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance”. This clause is, unfortunately, not followed in our country even by PSU’s and Government organisations. A strong and efficient Govt monitoring system is the best solution for this.
To increase the liquidity and credit control for MSME in 2018, PM Narendra Modi announced a system called Trade Receivable and e Discounting System (TReDS). This is an institutional mechanism set up in order to facilitate the financing of trade receivables of MSMEs from corporate buyers through invoice financing by multiple financiers. In November 2015 itself, RBI had given in-principle approval to three entities to set up TReDS. In November 2015, RBI had given approval to three entities to set up TReDS. They are Receivables Exchange of India Ltd (RXIL) a joint venture between Small Industries Development Bank of India (SIDBI) and National Stock Exchange of India Limited (NSE), TReDS Ltd (Known as Invoicemart) a joint venture of Axis Bank and mjunction services and M1 Xchange Promoted by Mynd Solutions Pvt Ltd.
This digital platform brings together the MSME Suppliers, all Buyers Corporates, Government Departments and Public Sector Undertakings and Financiers for facilitating uploading, accepting, discounting, trading and settlement of invoices or trade receipts of MSME Supplier. The process involves uploading a valid invoice by the MSME Supplier on the TReDS Platform, and approval of the invoice by the Buyer. Upon approval, various Financiers start to bid on the invoice at discounted rates. The MSME Supplier can exercise its discretion while accepting the bid and, upon acceptance, the payment is processed, and the MSME Supplier’s account is credited with the discounted amount. Reverse bidding and reverse factoring to the buyer is also an option. The transactions processed under TReDS are “without recourse” to the MSMEs that is in case buyer defaults the payment to financier the MSME seller is not liable.
The MSME Ministry vide its Notification) bearing S.O. 5621(E) dated November 02, 2018, has mandated all Large Corporates registered under the Companies Act, 2013 with a turnover of more than Rs. 500 Crore and all Central Public Sector Enterprises to get themselves registered on the TReDS Platform to ensure cash liquidity for MSME Suppliers.
This platform has also not been able to help the MSME’s in an expected way, because there are a large number of companies ranging between 200-500 Cr annual turn-overs. Approving the invoice in PSU’s is a long drawn process. Many of the corporates above 500 Cr are still not registered in this platform. Many of the State governments and its enterprises who are following extended payment cycle is not registered under this system and not mandatory for them. Some state Govts are delaying the payment up to 360 days and even more for the public procurement.
All the stakeholders MSME suppliers, Buyers of all categories such as companies registered under companies act 2013, Central PSU’s Central and state government departments, statutory bodies and financiers come in single TReDS platform could make a revolutionary change in Industry, and that is the only solution for creating liquidity and confidence in MSME specifically. Public procurement policies also need to be amended in such a way of incorporating the TReDS registration along with Government e-Market Place (GeM).