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M1xchange, one of the invoice discounting and factoring service providers on India’s TReDS platform, in partnership with private lenders YES BANK and RBL Bank has announced that it has started testing of ‘Small-Small Factoring’ product under the Reserve Bank of India’s (RBI’s) third cohort of the regulatory sandbox. According to the company, the product aims at facilitating ‘early liquidity’ for MSME buyers and sellers.
The product essentially involves digital credit assessment of MSMEs through the latter’s cash flows. It analyzes authentic, non-repudiable data of MSMEs from multiple digital sources to generate insights into a business’s credit profile. The cash flow-based approach alleviates traditional concerns around the authenticity of MSMEs’ business financials, a key data source in the traditional balance sheet-based credit assessment model, the company noted.
Once fully rolled out, the product is likely to help address over $750-billion credit gap for MSMEs in India. The testing of the product is expected to be complete by September 2022.
“In the current inflationary market, where the cost of raw material has gone up multifold and stocks have to be purchased in advance to manage the supply chains disruption, MSMEs’ need for working capital is very high. The traditional OD/CC limits sanctioned on basis of MSME financials and the collateral they offer will fall short of WC needs. The cost of funding outside the banking system is very high for MSMEs,” said Sundeep Mohindru, CEO, M1xchange.
With this solution developed by M1xchange TReDS, MSME enterprises will be able to utilise TReDS for receivables discounting from their MSME Buyers and MSME buyers in turn will be able to procure at better prices and manage their inventory adequately, he added.
In the current TReDS model, the majority buyers are large with a turnover of more than Rs 500 crore and a long-term credit rating better than A-. However, financiers lack credit appetite for MSME buyers, who lack the balance sheet strength associated with a large corporate buyer, M1xchange said.
“This unique approach to digitally harness data and risk analytics — which could help replace traditional balance sheet-based risk assessment model with cashflow-based credit analytics — can potentially be a game-changer to provide better and quicker credit access to MSMEs, while also helping the bank (Yes Bank) augment its positioning as the preferred ‘Digital Partner’ for MSMEs,” said Ajay Rajan, Country Head – Transaction Banking, YES BANK.