TReDS and Its Contribution to Economic Growth
TReDS (Trade Receivables Discounting System) was introduced in 2014 as a joint initiative between the Reserve Bank of India, the Small Industries Development Bank of India (SIDBI), and the National Payments Corporation of India (NPCI) to provide easy access to funds for MSMEs.
TReDS helps MSMEs to get out of their working capital constraints and receive finance based on trade receivables accounted in their business.
TReDS usually works on a tripartite agreement between finance companies, government bodies, and MSMEs. The platform leverages investment opportunities for financiers as they get a trusted platform to lend their funds and receive better returns to invest in a new asset class with minimal risk.
TReDS interlinks several corporates, PSUs, and government agencies to provide finance to these entities by determining their asset value, credit history, and business value, and through easy documentation.
Providing their business invoices on the platform, MSMEs can raise funds from multiple banks or NBFCs where the financiers bid for providing them credit based on their invoice values and recent receipts. The loans approved are executed in real-time where MSMEs can choose the organization to accept the loan agency and the offer provided. Through TReDS, the disbursement is undertaken within 24 to 72 hours of uploading the invoices, thereby enhancing the liquidity power of these entities.
TReDS, since its launch, has significantly contributed to the growth of the economy where it helped small businesses and recognizing MSME units:
- To raise funds through formal channels without many complications.
- To build their credit history by enabling them to receive offers from different financiers based on their trade value.
- To create a mechanism to detect and reduce the incidences of delayed payments to MSMEs where complaints or issues can be raised for delayed payments from other MSMEs, government bodies, or corporates.
- To employ millions by extending the scale to the business of MSMEs.
- To build the reputation of MSMEs in financial agreements and build the trust of suppliers in them.
- To boost their working yield through promoting the Digital India Initiative, where most of the transactions on the platform are done seamlessly through different online means and without any middlemen involved.
- To extend support to other MSMEs, resulting in the overall growth of the GDP of the country.
- To further make the platform a win-win for both the businesses and the institutions linked with TReDS, the Reserve Bank of India provided an extension to the service granted through the platform. Considering the network of the platform, RBI proposed to include insurance facilities, private lending through listed entities (entities to work as financiers), and to start secondary market operations through the platform.
These improvements in the system are decided to place to increase the revenue of entities and build a low-compliant formal credit source for businesses. TReDS, as concluded by experts, will bring a revolutionary change in the way finance is raised by MSMEs without requiring major documentation and approvals.
Approved by RBI, the insurance facility for trade receivables will certainly open more opportunities for general insurers, and the secondary market operations that are to be executed will enhance the market liquidity for MSMEs.
TReDS, in recent years, has significantly contributed to the economic growth and overall development of medium and small-sized entities. Moreover, TReDS has led to bringing transparency and efficiency to the online invoice auctioning system for MSMEs. It plays a vital role in the overall growth and productivity of SMEs, indirectly supporting the economic pillars of the country.
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