The Reserve Bank on Wednesday expanded the trade receivables discounting system (TReDS) by permitting insurance companies to function as participants, a move aimed at improving the cash flows of MSMEs.
The RBI issued guidelines on TReDS in December 2014 with the objective of facilitating the financing of trade receivables of MSMEs. Subsequently, three entities started operating TReDS platforms. These entities process about Rs 60,000 crore worth of transactions annually.
Based on the experience gained, the RBI expanded the scope of the platform.
"Apart from MSME sellers, buyers and financiers, insurance companies are permitted to participate as "fourth participant" in TReDS," it said in a circular.
Financiers place their bids on the TReDS platforms keeping in view the credit rating of buyers. They are generally not inclined to bid for payables of low-rated buyers.
To overcome this, an insurance facility is being permitted for TReDS transactions, which would aid financiers to hedge default risks, the RBI added.
In their business or operational rules, the TReDS platform operators may specify the stage at which insurance facility can be availed, the central bank added.
"Premium for insurance shall not be levied on the MSME seller," it said.
The RBI has also expanded the pool of financiers. TReDS transactions fall under the ambit of “factoring business”, and banks, NBFC-Factors and other financial institutions can presently participate as financiers in TReDS.
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. This would augment the availability of financiers on TReDS platforms," the circular said.
TReDS platforms facilitate transparent and competitive bidding by the financiers.