Lenders, MSMEs flock to electronic bill exchanges

System gives small firms access to cash, helps banks find new creditworthy customers

Electronic bill exchanges are the latest match-making venues for lenders seeking new clients and small entities desperate for capital.

The fledgling exchanges, opened under the Trade Receivables Discounting System (TReDS), have attracted a host of lenders otherwise shy of financing companies with low credit ratings, since the new system allows them to find creditworthy clients and build new relationships.

Typically, micro, small and medium enterprises (MSMEs) that supply products or services to larger companies raise their bills (or trade receivables) but have to wait long to be paid, resulting in a shortage of working capital. Under TReDS, the MSME uploads the same bill on a TReDS bill discounting exchange, where lenders bid to buy the bill, depending on the creditworthiness of the bigger company. The selected lender—which offers the lowest discount or margin—pays the MSME, and later receives the payment from the larger company. It’s a win-win situation for both the MSME (which gets immediate cash) and the lender (which find new creditworthy customers, though with less risk due to the payment due from the larger company).

Joining TReDS has helped new MSME clients get access to priority sector lending-compliant loans and build stronger portfolios, lenders said. “The benefit of such collaborations is that the exposure is on a stronger entity and banks get opportunity to build a relationship with both the large companies as well as MSMEs. Also, availability of more authentic data due to GST will enable banks to do better due-diligence and help give more credit to MSME,” said Ashok Kumar Garg, executive director at Bank of Baroda. The state-owned lender has tied up with all three TReDS exchanges licensed by the Reserve Bank of India in November 2015.

There are around 30 million business establishments in India’s informal economy, with MSMEs having a 32% share, according to the government. The latest RBI data showed that loans to MSMEs (which are classified as priority sector loans), stood at Rs9.07 trillion as on 22 December 2017, up 10.6% from a year earlier.

According to bankers, goods and service tax (GST) has brought many companies under the tax umbrella, making banks confident of lending to them.

According to Sundeep Mohindru, founder of M1xchange, one of the three TReDS exchanges, since the bills are being paid basis the credit risk of large companies, the rate of discounting (or the margin charged by the lender) is around 8-10%. That is lower than the average 12% interest charged by banks to give collateral-based working capital loans.

“In the December quarter, banks who had registered on the platform earlier exhausted their internal limit for a particular company and are raising the limits based on their experience. New lenders are quickly putting systems in place to discount bills and grow their books,” he said, adding that, so far, 15 banks and over 225 companies and MSMEs have registered on the exchange.

Invoicemart is another bill discounting exchange run by A. TREDS Ltd, a joint venture between Axis Bank and e-commerce company Mjunction Services. It has registered 250 MSMEs, 27 large companies and eight financial institutions. Launched in July 2017, Invoicemart has discounted around 7,000 invoices worth Rs250 crore, Kalyan Basu, chief executive officer and managing director said. It aims to reach target of Rs11,000 crore in two years given the potential of the system.

MSMEs are usually capital-starved because of limited access to bank credit. One of the key reasons is lack of documentation and skills to predict future cash flows, weak account maintenance, and non-compliance with taxation rules, bankers said. Additionally, demonetization had impacted their finances, which were already stretched because of delays in payments by large companies at least by over a quarter.

Apart from TReDS, other announcements too are likely to boost credit demand to the sector. In his budget speech on 1 February, Union finance minister Arun Jaitley announced bringing on board more state-owned banks at TReDS platforms and linking them with the GST Network. This was in addition to the tax sops and credit support, capital and interest subsidy that were announced for MSMEs.

Separately, RBI on 7 February gave additional time for loan repayment to certain MSMEs affected by GST, without getting their accounts classified as non-performing. This facility is available only to those firms whose aggregate loans are less than Rs25 crore.

These steps may prompt more lenders to register themselves on these platforms.