Corporates miss vendor payments, bill discounting platforms see red

Several large corporates which have issued ‘bills of credit’ are now demanding additional 30 to 60 days to honour their commitment. According to leading players in this segment, repayment has been delayed in 50 – 60% of the invoices due this month.

Invoice discounting platforms – which help SMEs monetise long-dated trade bills and promissory notes – have started seeing ‘repayment delays’ against the backdrop of the nationwide lockdown. Several large corporates which have issued ‘bills of credit’ are now demanding additional 30 to 60 days to honour their commitment.

According to leading players in this segment, repayment has been delayed in 50 – 60% of the invoices due this month.

“Almost all corporates that have delayed payments have agreed to clear their bills once the lockdown is over. They’ve asked for some time extension,” says Anurag Jain, founder – executive director of KredX, a popular bill discounting platform.

Invoice discounting is the process of trading or selling the bill of exchange before it gets matured, at a price less than its par value. The discounting rate on a bill is calculated on the basis of ‘leftover time’ for its maturity and the risk involved in it. By resorting to “discount” a bill (payable in 30, 60, 90 or 120 days), the small vendor gets his money immediately. This, invariably, is redeployed back in business to meet the vendor’s working capital needs.

“This delay in bill payments is not because of any logistical reasons. It is purely operational issues… Many large corporates are shut for several days now – and there’s no business as such,” says Alok Mittal, founder-CEO of Indifi Technologies.

Unlike KredX, Indifi does not allow small vendors to sell or trade their invoices. They only facilitate loan against bills. These loans are disbursed by Indifi’s in-house NBFC or financial institutions partnering the firm.

Apart from a few private players, the RBI has allowed Receivables Exchange of India, A.TReDS and M1Xchange to operate online bill discounting platforms under its ‘Trade Receivables Discounting System’ (TREDS) initiative. The three platforms combined have alone discounted bills worth Rs 18,000 crore last fiscal. Private players such as KredX, Indifi and Lendingkart have smaller operations – but they still do roughly Rs 5,000 crore worth of bills volumes.

“The problem is at two levels,” explains Sundeep Mohindru, founder-CEO of M1xchange.

“Firstly, invoice discounting is only done if the corporate approves the bill presented by the vendor. Several companies are yet to approve bills generated in the fourth quarter,” he says.

“So the payment delay is now taking place for goods or services offered (by small vendors) two months ago. Corporates appear to be very uncertain about the future; they’re worried about their stock and inventories. This uncertainty is causing delay in vendor bill approvals,” Mohindru adds.

“Secondly, there are instances where corporates have approved the bills, but big invoice financiers such as banks are now doing this business very selectively – due to the uncertain environment,” he adds.

While most platforms have institutional investors (banks, NBFCs et al) as ‘buyers’ of these papers, platforms like KredX have made invoice financing as an asset class for savvy investors. The buyers – numbering over 20,000 – on KredX platform are mostly family offices, high networth individuals, NBFCs and corporate treasuries and the minimum investment threshold is Rs 3 lakh.

“Invoice financing is not a zero-risk product… there’s a credit risk, for sure. So we advise our investors to split their investments across several vendors and bill issuers. Our investors have managed to generate 12 – 15% annualized returns,” says KredX’s Jain.

According to platform operators, several corporate are also using RBI’s ‘three-month loan moratorium’ (announced in March-end) as an excuse to delay vendor payments. A few corporates are also said to be conserving cash by delaying payments. Auto companies, textile manufacturers, retail & FMCG companies, pharmaceuticals and agro-processing companies account for a lion’s share of invoice issuers in India. Bulk of the companies in these sectors take 60 – 90 days to honour vendor bills.

“Traditionally, factoring and bill discounting are business with higher NPAs and loss ratios, how much ever you try to control it,” says the top executive of a leading bill discounting platform.

“Many of the issuers currently are large corporates; we expect a lot of them to pay up over the next two to four months,” he adds.

In most cases, the onus to recover money from corporates remains with the vendor – even if the invoice is sold to someone else. Most platforms, which allow trading of invoices, keep 25 – 30% of vendor’s incoming funds as margin money; this is only released after the vendor manages to get the discounted bills honoured (by the corporate).

In case of platforms which allow loan against bills / invoices/ receivable receipts, the vendor has to repay borrowed funds in the stipulated time. On TReDS platforms, the financier (who has bought the bill from a vendor) is responsible for collecting dues from the company.

“The prevailing uncertainty around business has to be controlled. Corporates should be encouraged to approve bills and pay up when the repayment time comes… If they want more time, they should be given that,” says Mohindru.

“Banks and other financiers should be encouraged to start funding invoices… Only by doing so, we’ll be able to restart the supply chain now,” he adds.

Vendors and SME owners, on their part, have enough remedies in the MSME Act to recover their dues from corporates.

“The bill discounting ecosystem is on a stronger footing than what it was ten years ago… The product construct – across players- is robust enough to handle issues such as non-repayment, defaults and bill frauds,” says Mittal of Indifi.

While there may be enough legal recourse for SMEs to get their money back, small business owners may not have enough cash surpluses to tide over tough months ahead. Large corporates defaulting on vendor payments – or delaying it indefinitely – could be as risky as taking a match to a powder keg.

HOW IT WORKS?

1. A vendor / SME-owner sells material or services to a corporate.

2. The corporate does not pay immediately; instead an invoice (payable on a specific date) is raised

3. The vendor takes this receipt to a discounting platform. The platform checks the legitimacy of the bill and creditworthiness of the bill issuer (the corporate).

4. Depending on the nature of the platform, the vendor can sell the invoice at a discount or take a loan by holding the invoice as collateral.

5. If the vendor is trading (selling) the invoice, it’ll be done at a discounted rate (to the total value of the bill). The bill would be bought by ‘buyers’ (investors, financiers) on the platform.

6. The vendor gets funds immediately which can be used for further business.

7. On the due date of payment (which could be 30/60 days after bill issue), the buyer would get the full amount mentioned in the bill.

8. If the vendor had opted for a loan against the bill, he’ll have to collect the money from the corporate and repay his (invoice-backed) lenders.