Trade Receivables Discounting System
Also called: TReDS · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
The Trade Receivables Discounting System (TReDS) is an electronic platform for MSME invoices. When an MSME is owed money by a large buyer, it uploads the invoice. Many financiers then bid to discount it, meaning they pay the MSME cash now at a small discount. The buyer pays the financier on the due date. RBI issued TReDS guidelines in 2014. The platforms are RXIL, M1xchange and Invoicemart. Companies with turnover above Rs 250 crore and CPSEs must join. TReDS supports the MSMED Act rule that MSMEs be paid within 45 days.
Example
An MSME supplies parts worth Rs 20 lakh to a large carmaker, which will pay in 60 days. The MSME uploads the invoice on TReDS. The carmaker accepts it, several banks bid, and the lowest discount wins. The MSME gets about Rs 19.7 lakh within days.
Don't confuse with
- Factoring: a deal between a firm and a single factor. TReDS is an auction among many financiers for invoices on large buyers.
Related concepts
- CASA ratio
- Credit-deposit ratio
- Base rate
- Marginal Cost of Funds based Lending Rate
- External Benchmark Lending Rate
- Loan-to-value ratio
- Adverse selection
- Credit information company
- Letter of credit
- Factoring