MSME Credit through discounting

Bridging the MSME Credit Gap: TReDS as a Strategic Liquidity Solution

This article, contributed by CA. Sundeep Mohindru, examines the persistent credit challenges faced by MSMEs in India and highlights the Trade Receivables Discounting System (TReDS) as a strategic financial solution to address these liquidity gaps.

MSME Credit Scenario: Gaps and Structural Constraints

MSMEs are recognized as the driving force behind India’s economic engine. As of FY25, MSMEs contribute over 30.1% to India’s GDP, drive more than 45.73% of exports, and provide employment to over 28 crore people. Globally, over 40% of the formal MSMEs from developing economies face a combined credit shortfall of $5.7 trillion annually.

In India, despite progress in formal credit access, a startling ₹30 lakh crore credit gap persists, with access reaching only 19% of registered MSMEs. These businesses often rely on informal credit sources, which typically involve strict repayment terms and high interest rates.

A significant obstacle is disruptions to cash flow caused by delayed payments from large corporations and government agencies, often stretching beyond the 45-day limit stipulated by the MSME Development Act, which is often laxly enforced. This delay forces many small businesses to avoid demanding on-time payments for fear of losing future business.

TReDS Explained: Legal and Operational Framework

TReDS is a digital initiative, overseen by the RBI, designed specifically to address the major issue of late payments from buyers. It is a technology-driven model that closes the timing and trust gap between small firms and financiers.

Mechanism and Benefits:

1. Digital Discounting: MSME suppliers upload their approved invoices to the secure TReDS platform, where a network of registered financiers (banks, NBFCs, and insurers) compete to buy them.
2. Early Payment: MSMEs can obtain funds in a matter of hours, typically receiving the discounted payment almost instantly after the buyer verifies the invoice.
3. Non-Recourse Basis: A key feature is that TReDS financing operates on a non-recourse basis—meaning if the buyer defaults on payment, the MSME supplier is not held liable to repay the financier.
4. Off-Balance-Sheet Treatment: The financing is handled off the buyer’s balance sheet, ensuring vendor payments are made without straining the buyer’s internal cash cycles. For financial reporting, TReDS transactions qualify for off-balance-sheet treatment under Indian Accounting Standards (Ind AS), preserving key debt metrics for buyers.
5. Compliance Support: Utilizing TReDS helps buyer companies comply with MSME payment timelines, thereby avoiding the disallowance of expenses under Section 43B(h) of the Income-tax Act for payments not cleared within 45 days.

Key Regulatory Developments

The TReDS ecosystem has seen substantial improvements to become a more reliable and inclusive financing option for MSMEs.

• Expanded Financier Pool: The RBI permitted insurers and non-banking financial companies (NBFCs) to act as financiers on the platform, significantly expanding the pool of capital providers.
• Mandatory Registration: In FY 2024–25, the RBI reduced the mandatory TReDS registration threshold for companies from ₹500 crore to ₹250 crore in annual turnover. All companies with turnover exceeding ₹250 crore are now required to register on the platform.
• Integration: TReDS integration with government platforms like GeM SAHAY and e-invoicing portals has further streamlined the invoice validation process, ensuring data accuracy and preventing fraud.

Impact and Metrics

The TReDS ecosystem is increasingly recognized as a dependable and scalable financing option. TReDS platforms have discounted invoices worth over ₹600,000 crores since inception, with discounting worth over ₹235,000 crores facilitated in FY 24-25 alone. This expansion indicates a shift toward more open and effective working capital procedures.