The Centre is seeking to cut through swathes of bureaucracy and speed up bill payments by getting its departments to compulsorily adopt the Trade Receivable Discounting System or TReDS. For the government, quick vendor payments should enhance competitive intensity — and lower its costs.
This will, for instance, allow government entities such as the Defence Ministry’s 41 Ordnance Factory Board (OFB) companies to avail financing facilities by collateralising the receivable invoices of vendors supplying artilleries, tanks, helmets to India’s armed forces, under sovereign guarantee on the RBI-regulated TReDS platform.
To this effect, a Parliamentary committee headed by former Union minister Jayant Sinha has submitted its recommendations seeking amendments to critical clauses through the Factoring Regulation (Amendment) Bill of 2020 in the ongoing budget session, ET has learnt.
“…receivables coming from the Central and state governments should compulsorily be brought under the ambit of TReDS through this legislation so that payments pending which have already been approved for various MSMEs are made available to them on a timely basis,” according to the cited report.
ET has seen a copy of the report tabled in both houses of Parliament earlier this month.
“Government entities can use the TReDS platform to demonstrate that they are good at paying their bills and thus, get more bidders for their projects,” according to the parliamentary committee report. The recommendations will now undergo scrutiny of upper and lower houses of the Parliament.
CASTING THE NET WIDE
Separately, the committee has also asked the government to allow India’s over 9500 NBFCs to be financiers on the platform. Currently, only banks are allowed to finance trade invoices against future receivables on TReDS.
“The proposed amendments coupled with these initiatives are expected to provide an impetus to factoring as an attractive source for short term financing for MSMEs…” according to the report. “…the total number of NBFC factors offering finance could go up from 7 to several thousand fostering greater competition, MSMEs will be able to avail cheaper financing…This will also boost employment in the country,” it added. According to sources in the know, senior officials in both the defence and the railway ministries have initiated enquiries to understand the benefits of settling dues through the centralised TReDS platform.
Discussions on this matter were first initiated by Defence Secretary Ajay Kumar with bureaucrats, including the Department of Financial Services additional secretary Pankaj Jain and representatives from the three operating TReDS platforms. ET has seen a copy of the minutes of the meeting held on August 7, 2019.
“These discussions were gathering pace in 2020 before the pandemic. The committee recommendations could accelerate these talks,” one of the sources cited above said.
Officials from the Railway Ministry had expressed an interest in getting their suppliers onboarded, the person added.
A BIG FACTOR
According to the parliamentary report, India’s factoring market is “at a very nascent stage” with its size currently pegged around $6 billion. As a percentage of GDP, it is significantly lower (0.2%) than comparable developing economies such as Brazil (4.1%) and China (3.2%). The European factoring market currently dominates the global industry and India has a chance to disrupt this.
Other key recommendations include the integration of GSTN e-in voicing portal with TReDS as well for smoother underwriting, allowing insurers to provide credit insurance and bringing MSMEs under the stricter ambit of credit rating agencies.
Introduced in 2017 as a centralized bill discounting system, the RBIregulated TReDS is a mechanism that allows buyers and sellers, which are typically the corporates and MSMEs, to settle routine contracts electronically where banks and NBFCs on the platform can bid in real time for invoices they want to finance at competitive rates.
There are three TReDS companies facilitating the operations on the platform: RXIL is a joint venture of SIDBI and NSE, Axis Bank owns Invoicemart and Mynd Solutions controls M-junction. They have collectively discounted invoices worth Rs 15,000 crore drawn by 25,000 MSMEs, as per latest data.