M1xchange sees NBFCs driving TReDS volumes

MUMBAI – The Budget proposal to allow non-banking finance companies to participate in Trade Receivables Discounting System, or TReDs platforms, is likely to increase the liquidity on these platforms “manifold”, according to M1xchange Chief Executive Officer Sundeep Mohindru.

The Budget For 2019-20 (Apr-Mar) Proposed To Amend The Factoring Regulation Act To Allow All Non-banking Finance Companies To Directly Participate On The TReDS Platform

“…with that change, the liquidity should go up manifold and the invoices for the corporates which are not getting funded by the banks due to credit ratings of those companies, will also start getting funded by the NBFCs because their risk appetite is very different,” Mohindru told Cogencis in an interview.

M1xchange, or Mynd Online National Exchange for Receivables, is one of the three TReDs platforms in the country. The platform facilitates discounting of invoices and bills of exchange, or trade receivables of micro, small and medium enterprises from corporate and other buyers, through multiple financiers such as banks and non-bank entities.

The Union Budget for 2019-20 (Apr-Mar) proposed to amend the Factoring Regulation Act to allow all non-banking finance companies to directly participate on the TReDS platform. Currently, only non-bank entities registered as NBFC-Factor are allowed to participate in the platform.

Factoring or invoice discounting refers to transfer in ownership or financing of accounts by a third party or factor at a discount for commission and fees, wherein the factor makes a profit upon the settlement of the debt.

“We have already started speaking to NBFCs… we are just awaiting the guidelines from the government,” Mohindru said, adding that he expects non-bank lenders to start joining the platforms by October.

The actual pickup in volumes may happen after three to six months, as non-banking finance companies get used to the platform and gradually increase their risk appetite, Mohindru said.

Though M1xchange hopes to bring on board the top 100 non-banking finance companies on its platform, Mohindru feels the current liquidity issues in the sector will decide how much risk appetite these lenders will have.

He expects trade receivables platforms to pick up once the recommendations of the Reserve Bank of India’s expert committee on micro, small and medium enterprises are implemented. The committee, headed by former Securities and Exchange Board of India chairman U.K. Sinha, recommended creating a second TReDS window for reverse factoring.

“We are engaged with RBI… to fine tune the options. Instead of opening a new platform, I think RBI is talking about opening new products on the TReDS platform,” Mohindru said.

According to him, of all the participants on the platform, banks tend to take the least risk, followed by factoring companies, which take slightly higher risk.

For public sector banks, the approval process for accepting invoices on TReDs is slower, which cuts short the actual period that an invoice can get discounted, Mohindru said.

Private banks, on the other hand, tend to take decisions much faster and provide the bulk of the volumes on receivables platforms.

The number of active lenders was at 28 in March, as against 15 in December and six in 2017-18.

On M1xchange, half the market share is held by private banks, followed by factoring non-bank finance companies with 30% and public sector banks with 20%.

As new players join the exchange, the amount of unserviceable business will reduce, he said, adding that the o-nboarding of mutual funds and corporate treasuries would aid this, as they have the appetite to take on slightly riskier papers.

In 2018-19, about 30% of the business was left unserviced, which means the volumes were at 25 bln rupees when it could have actually been 35 bln rupees.

M1xchange has brought on board 300 large private sector companies on the platform and 40% are already live, Mohindru said.

“Once we have all 100% operational, the volumes will be very different. It will take us another year by the time they get fully operational.”

Invoices issued by silver, jewellery, and real estate companies were the ones which evoked the least interest.

M1xchage, which started operations in 2017, discounted bills worth 25 bln rupees in 2018-19, five times the volume the previous year. The platform hopes to double the volumes in the current financial year.

Mohindru said that M1xchange has about 40% share in total volumes on TReDs platforms, and that he expects to achieve cash break-even by the end of the current financial year, which is when the company will consider raising fresh capital.

The quantum of funds to be raised will be directly proportional to whether M1xchange will be doing business only within the country or expand its operations overseas.

“We are also keen on expanding the network globally… we are now looking to think and see if this network can become global,” he said.

With the Indian operations providing the proof of the concept, there could be an opportunity to look at matured markets and Southeast Asia, he said.

Mohindru said there seem to be opportunities for trade receivables platforms on cross-border trades, where the buyer and the supplier could be in separate countries. End

Edited by Shirsha Thakur