Multi-Financier Factoring Exchange: TReDS and RXIL

The Micro, Small and Medium Enterprises (MSME) sector is crucial to India’s economy, contributing around 30% to the GDP and employing 110 million people. Despite its significance, the sector faces challenges, particularly in accessing adequate and timely credit, with a substantial credit gap of INR 25.8 trillion, according to the November 2018 International Finance Corporation (IFC) report. Delayed payments from large buyers, including private corporations and public entities, exacerbate this issue, locking up working capital and severely affecting cash flow. The government has implemented measures such as the Priority Sector Lending (PSL) requirement for commercial banks, various credit guarantee schemes, and the MSME Samadhaan portal to resolve delayed payment issues to support the sector. Despite these initiatives, the system has slow resolution and a massive backlog of cases. Capitalizing on the potential and success of public provision of digital infrastructure, the Reserve Bank of India (RBI) launched the Trade Receivables Discounting System (TReDS) in 2016, a digital platform allowing MSMEs to auction their trade receivables for timely payments and liquidity. Receivables Exchange of India Limited, the first TReDS platform, has facilitated faster payments, improving working capital cycles for MSMEs. A case study of Suyog Electricals Ltd. illustrates how TReDS improved working capital cycles, prompting a competitor, Sheldon Wires Ltd., to evaluate the benefits of registering on the platform after witnessing Suyog’s success.

Learning Objectives

• Emphasize the significance of a shorter receivables cycle for business growth, particularly for financially constrained small firms.
• Provide students with an understanding of receivable financing, specifically focusing on factoring.
• Introduce a unique, multi-financier factoring platform that addresses the challenge of delayed payments for small firms in India. Emphasize the importance of digital public infrastructure for such platforms in the context of developing economies like India.

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