In a landmark decision announced on 7th November 2024, the Ministry of Micro, Small, and Medium Enterprises (MSMEs) has issued a notification mandating specific categories of businesses to register on the Trade Receivables Discounting System (TReDS) platform. This decision is set to revolutionize the liquidity landscape for MSMEs, with the government lowering the turnover threshold to Rs 250 crore, ensuring more businesses fall under the ambit of the regulation.
This move is part of the government's ongoing commitment to ensuring timely payments and financial stability for MSMEs, a crucial backbone of the Indian economy.
What is TReDS?
TReDS is an electronic platform facilitating the financing and discounting of trade receivables for MSMEs. It enables suppliers to access funding by auctioning their receivables from buyers (typically large corporations or public sector undertakings) to multiple financiers.
Key benefits include:
- Faster Payment Cycles: Reduces delays in payment to MSMEs.
- Improved Liquidity: Ensures timely access to working capital.
- Transparency: Facilitates real-time transactions and reduces disputes.
What's New in the Mandate?
1. Lower Turnover Threshold
Previously, only companies with a turnover of Rs 500 crore or more were required to register on TReDS. The new mandate reduces this limit to Rs 250 crore, significantly expanding the scope of eligible companies.
2. Who is Affected?
The notification applies to:
- Corporates with a turnover of Rs 250 crore or more.
- Public Sector Undertakings (PSUs).
- Large buyers engaging in regular trade with MSMEs.
3. Broader MSME Coverage
This amendment ensures that a larger number of MSMEs benefit from faster payment cycles and easier access to working capital, addressing long-standing issues of delayed payments.
Why This Move Matters?
1. Timely Payments: MSMEs often face delayed payments, leading to cash flow disruptions. TReDS ensures that MSMEs receive their dues promptly, improving their liquidity and operational efficiency.
2. Inclusive Growth: Lowering the threshold to Rs 250 crore brings mid-sized companies into the fold, fostering greater financial inclusivity for MSMEs across sectors.
3. Promotes Digital Financing: TReDS aligns with India's push toward digital transformation, creating a transparent, efficient, and scalable financial ecosystem.
4. Strengthened Buyer-Supplier Dynamics: Companies using TReDS can build stronger, trust-based relationships with their MSME suppliers, ensuring long-term collaboration.
How TReDS Works?
1. MSME Supplier Onboards: The supplier registers on TReDS and uploads invoices pending from buyers.
2. Auction for Financing: Financiers compete to discount the invoices.
3. Immediate Funding: MSMEs receive immediate payment at a discounted rate.
4. Buyer Settlement: Buyers repay the financiers on the agreed due date.
Example: How TReDS Helps MSMEs Get Paid Faster
Scenario: XYZ Components, a small MSME, delivers goods worth Rs 2,50,000 to ABC Industries, a corporate buyer. The payment terms give ABC Industries 45 days to pay, but XYZ Components needs money sooner to take on another order.
How TReDS Works in This Case
1. Listing the Invoice
- XYZ Components lists their invoice of Rs 2,50,000 on the TReDS platform.
- The invoice becomes available for financiers to bid on.
2. Financing the Invoice
- A financier offers to pay XYZ Components Rs 2,40,000 immediately, keeping a Rs 10,000 discount as their fee.
- XYZ Components accepts the offer and gets the money in just 3 days, instead of waiting for 45 days.
3. Final Payment by ABC Industries:
- On the due date (45th day), ABC Industries pays the full Rs 2,50,000 directly to the financier.
Benefits for Everyone
- XYZ Components (MSME): Gets fast access to funds, helping them take on more work without waiting for payment.
- Financier: Earns Rs 10,000 as profit for providing the money early.
- ABC Industries (Buyer): Pays the full amount on time and builds trust with their supplier while complying with TReDS requirements.
Conclusion
The Rs 250 crore turnover amendment to the TReDS mandate is a game-changer for MSMEs andtheir financial ecosystem. By addressing payment delays and providing timely access to workingcapital, the initiative empowers MSMEs to drive growth and innovation.
For businesses affected by the notification, onboarding TReDS is not merely a compliance requirement but an opportunity to enhance their financial processes, strengthen supplier relationships, and contribute to the broader economic growth of India.
The government's bold step underscores its commitment to supporting MSMEs, ensuring their sustained growth in an increasingly competitive market.
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