RBI allows all factors to participate as financiers on TReDS platforms

To augment the availability of financiers on TReDS (Trade Receivables Discounting System), the Reserve Bank of India (RBI) on Wednesday, allowed all entities that can undertake factoring business, to participate as financiers on such platforms.

“The Factoring Regulation Act, 2011 (FRA) allows certain other entities / institutions to undertake factoring transactions. Accordingly, all entities / institutions allowed to undertake factoring business under FRA and the rules / regulations made thereunder, are now permitted to participate as financiers in TReDS,” the central bank notified.

TReDS transactions fall under the ambit of ‘factoring business’ and currently only banks, NBFC-Factors and other financial institutions can be financiers.

The RBI also permitted insurance facility for TReDS transactions to aid financiers to hedge default risk. This is because financiers usually place their bids keeping in view the credit rating of buyers, and are not inclined to bid for payables of low rated buyers.

Insurers on TReDS

As a result, insurance players will be now become the fourth participant on TReDS platforms, in addition to MSME sellers, buyers and financiers.

TReDS platform operators will need to specify the stage at which insurance facility can be availed. Further, no insurance premium can be levied on MSME sellers, and collection of premium and related activities will be enabled through National Automated Clearing House (NACH) system.

“Based on consent received from financiers and insurance companies, TReDS platforms could facilitate automated processing of insurance claims and specify timelines for their settlement through the NACH system. As of now, the credit insurance shall not be treated as a Credit Risk Mitigant (CRM) to avail any prudential benefits,” RBI said.

Factoring units

While TReDS guidelines provide for discounted or financed factoring units to have a secondary market, it has still not been introduced. Given the experience gained so far, TReDS platform operators may, at their discretion, enable a secondary market for transfer of FUs within the same TReDS platform, the central bank said.

TReDS platform operators have also been permitted to settle all factoring units—financed, discounted or otherwise —using the NACH mechanism, with specified timelines for funds settlement. This is to overcome the inconvenience caused to MSMEs and for better reconciliation, as around 17 per cent of factoring units uploaded are not discounted or financed and buyers need to pay MSME sellers outside the system.

To ensure transparent and competitive bidding by financiers, TReDS platforms will be required to display details of bids placed for a factoring unit to other bidders; without revealing the name of the bidder.

Three entities — A.TREDS (Invoicemart), Receivables Exchange of India (RXIL) and Mynd Solutions (M1 exchange) operate the three TReDS platforms in the country; whereas C2FO Factoring Solutions has been given in-principle authorisation.