Electronic bill exchanges are the latest match-making venues for lenders seeking new clients and small entities desperate for capital. The fledgling exchanges, opened under the Trade Receivables Discounting System (TReDS), have attracted a host of lenders otherwise shy of financing companies with low credit ratings, since the new system allows them to find creditworthy clients and build new relationships. System gives small firms access to cash, helps banks find new creditworthy customers.
Typically, micro, small and medium enterprises (MSMEs) that supply products or services to larger companies raise their bills (or trade receivables) but have to wait long to be paid, resulting in a shortage of working capital. Under TReDS, the MSME uploads the same bill on a TReDS bill discounting exchange, where lenders bid to buy the bill, depending on the creditworthiness of the bigger company. The selected lender which offers the lowest discount or margin pays the MSME, and later receives the payment from the larger company. It’s a win-win situation for both the MSME (which gets immediate cash) and the lender (which find new creditworthy customers, though with less risk due to the payment due from the larger company). Joining TReDS has helped new MSME clients get access to priority sector lending-compliant loans and build stronger portfolios.
The benefit of such collaborations is that the exposure is on a stronger entity and banks get opportunity to build a relationship with both the large companies as well as MSMEs. Also, availability of more authentic data due to GST will enable banks to do better due-diligence and help give more credit to MSME. The state-owned lender has tied up with all three TReDS exchanges licensed by the Reserve Bank of India in November 2015. According to bankers, goods and service tax (GST) has brought many companies under the tax umbrella, making banks confident of lending to them. MSMEs are usually capital-starved because of limited access to bank credit. One of the key reasons is lack of documentation and skills to predict future cash flows, weak account maintenance, and non-compliance with taxation rules. Additionally, demonetization had impacted their finances, which were already stretched because of delays in payments by large companies at least by over a quarter. Apart from TReDS, other announcements too are likely to boost credit demand to the sector. Separately, RBI on 7 February, 2018, gave additional time for loan repayment to certain MSMEs affected by GST, without getting their accounts classified as non-performing. This facility is available only to those firms whose aggregate loans are less than Rs 25 crore. These steps may prompt more lenders to register themselves on these platforms.