Defaults start rearing its ugly head on TReDs platform

Cash flow hiccups, confusion over terms of moratorium on term loans and working capital facilities trigger defaults

Severe cash flow challenges faced by large corporates coupled with confusion over applicability of Reserve Bank of India’s three-month moratorium on term loans and working capital facilities have triggered defaults in payments to small vendors registered on the Trade Receivables Discounting System (TReDS), the online bills discounting platform. “Today, the defaults are a trickle, but could end up becoming a torrent in a few weeks,” TReDS operators warned.

In order to ensure seamless cash flows to the micro, small and medium enterprises (MSMEs), the RBI, in 2014, allowed setting up of TReDS. Currently, the platform has three players ― RXIL (owned by SIDBI and NSE), Axis Bank-owned Invoicemart, and M1Xchange (promoted by Mynd Solutions).

Under the TReDS platform, MSME vendors can raise working capital by selling their trade receivables drawn on large corporates and PSUs to financial institutions. Banks and NBFCs, which finance such invoices under a competitive bidding process, will convert them to short-term loans to the corporates payable within 180 days. In the previous fiscal, the three platforms together discounted invoices worth ₹11,200 crore against ₹5,860 crore in FY19.

While the RBI’s March 27 announcement allowing moratorium on term loans and working capital explicitly mentioned Cash Credit (CC) and Overdraft (OD), it was silent about its applicability to repayments due on this platform. While TReDS operators feel it should be covered, banks are feeling otherwise.

“There is no clarity on the moratorium. While private banks have extended the moratorium on repayments to large corporates, many public sector banks are not allowing any extension on repayments,” said a senior official with one of the TReDS platforms mentioned above.

He also said that while his platform has not yet faced any major instances of default, many corporates have begun approaching the platform seeking extension of the repayment period.

“At the end, MSMEs, for whose cause the platform was set up, will be affected because corporates are not approving fresh invoices from vendors on the exchange,” he added. Without that, the cash flow situation of MSMEs will worsen further as they will not be able to discount their bills and raise finance.

The Covid-19-led pandemic and the ensuing lockdown have curtailed the cash churning ability of companies across industries. MSMEs, which form a significant part of the supply-chain eco-system to large corporates, are facing acute cash crunch.

“All companies are on a cash conservation mode because they don’t know when the situation will improve,” said a top official of another platform, adding that “companies need to safeguard cash for their essential operations, employee payments and other fixed expenses.”

The TReDS platform operators have written to the RBI, MSME Ministry and Department of Financial Services (DFS) seeking extension of the 90-day moratorium to all repayments falling due between March and June on the platform.

“You need to be clear. Otherwise, tomorrow there might be a scenario where defaults will take place because of the non-extension of bills,” the second official quoted above said.