TReDS: Can it really drive success for Banks, NBFCs and Fls?

In the digital age, TReDS is opening vast opportunities for financial institutions. The digital means adopted by TReDS facilitate a more extensive customer base and an array of services. For financiers, this translates to affordable access to a diverse pool of corporations and MSMEs. The transformative effects and benefits for banks, NBFCs, and other financial institutions are multifaceted.

The International Monetary Fund has predicted that India and China will jointly account for half of world’s growth in 2023 and 2024. Concurrently, the RBI also predicted that India will be a US $5 trillion economy by 2027, maintaining its lead over the UK, Japan, and Germany as the third largest economy of the world. Amidst these assessments, MSMEs, which contribute 33 per cent to domestic GDP, will remain a pivotal constituent for the growth of the Indian economy.

Yet, a significant constraint, which even the RBI has recognised, is the access to financing for MSMEs and the encumbrance of converting trade receivables to liquid funds. The problem is further exuberated due to the limited bargaining capacity of small enterprises, who often struggle with unfavourable credit cycles for goods and services offered to corporate buyers and blocked working capital. While invoice discounting bridges this gap, its adoption as a financing mechanism has been muted in India, primarily due to information asymmetry among MSMEs, which increases credit exposure of financial institutions. Given the insufficient publicly available credit information about MSMEs, the Trade Receivables Discounting System (TReDS) is emerging as a catalyst that is providing a fresh lifeline to small businesses and reshaping the dynamics for banks, NBFCs, and Financial Institutions (FIS).

Ripple effects on financial institutions

As the financial services industry experiences the influence of TReDS, its impact on the industry’s lending strategies is evident from the increased credit disbursal through all the TReDS platform. It has recently surpassed Rs 2 lakh crore throughput, the highest level ever, for 65,000 MSME suppliers in 1,800 cities. In 2023 till date, total invoices discounted for all the TReDS platforms amounted to more than Rs 79,000 crore, representing a significant increase from the previous fiscal year’s invoices of Rs 44,701 crore. In the digital age, TReDS is opening vast opportunities for financial institutions. The digital means adopted by TReDS facilitate a more extensive customer base and an array of services. For financiers, this translates to affordable access to a diverse pool of corporations and MSMEs. The transformative effects and benefits for banks, NBFCs, and other financial institutions are multifaceted.

• Meeting Priority Sector Lending (PSL) Targets Efficiently: The TReDS mechanism enables financial institutions to function using a foundation of high-quality PSL assets on behalf of the small and medium-sized enterprise sector. In addition to fulfilling their regulatory responsibilities, banks must actively encourage and support the advancement of development in this critical sector.
• Reduced Operational Costs: TReDS platforms ensure efficacy and transparency, thereby streamlining the budgeting procedure. Further, financing on the TReDS platform relies on the credit rating of corporate buyers, rather than MSME sellers. This translates to a sizable cost reduction for due diligence as financial institutions need to define the credit limit of buyers and not sellers. Add to it automation, which decreases operational expenses and manual errors that are inherent in conventional paper-based processes.
• Risk Mitigation: The TReDS platform deploys a credit risk assessment mechanism that aids banks and NBFCs in the management of credit risks linked to receivables, thereby enhancing the security of this lending method. In its essence, the system helps assess the genuineness of an invoice. Simultaneously, the recent integration of blockchain with TReDS is addressing the possibility of double discounting of invoices.
• Efficiency and Automation: TReDS facilitate the lending process by providing the entire digital transaction process, from enrolment to closing, at a variable cost. The banks obtain entirely onboarded customers in exchange for their invoices and proof of identity for each transaction. Banks are not restricted in their physical access to customers via TReDS, which enhances operational efficiency and cost-effectiveness.
• New Business Opportunity: By providing discounted financing to suppliers on the platform, notably small and medium enterprises (SMEs) that may have been disadvantaged by conventional financing methods, TReDS enables banks and NBFCs to expand their operations. Banks may find this to be a lucrative revenue stream.
• Informed Decision-Making for Enhanced Profitability: Financial market participants could enhance their ability to form informed judgments by gaining access to TReDS platforms. This facilitates the financiers’ process of making financing decisions.

The Future Landscape: Embracing Digital Banking with TReDS

TReDS marks a significant stride towards digital banking, offering MSMEs speedy, affordable, and competitive financial solutions. While recognizing TReDS as a catalyst, it’s essential to address evolving needs on the platform, such as creating a system for small players to trade within themselves voluntarily. Anticipating a surge in Deep Tier Supply Chain Financing, strategic adaptations on TReDS can lay the groundwork for the future. In conclusion, TReDS is not just a platform; it’s a transformative force in the finance ecosystem. It has unlocked unprecedented opportunities for banks, NBFCs, and FIs to access quality assets in the MSME space with minimal time, cost, and effort. This transformation reflects the strength of innovative financial approaches, paving the way for a revolution in Indian banking.