TReDS por­tal now key for MSME fi­nanc­ing

Banking Frontiers - - Finance Platform - TReDS is ex­pected to be a big boon for small and medium en­ter­preneurs mo­han@bank­ingfron­

The Re­serve Bank of In­dia had set up TReDS to en­sure flow of fi­nance to MSMEs from mul­ti­ple fi­nanciers at com­pet­i­tive rates. Sun­deep Mo­hin­dru, founder and CEO, M1Xchange, ex­plains the scheme

N. Mo­han: Can you out­line the gen­e­sis of TReDS and how it will help MSMEs in the coun­try se­cure vi­able fi­nanc­ing?

Sun­deep Mo­hin­dru: De­spite be­ing the ma­jor con­trib­u­tor to the in­dus­try, MSMEs face the chal­lenge of fi­nanc­ing their work­ing cap­i­tal at rea­son­able costs. To make liq­uid­ity avail­able to MSMEs, RBI un­der the Pay­ment and Set­tle­ment Act, 2007 fa­cil­i­tated the fi­nanc­ing of their trade re­ceiv­ables on­line, through an au­to­mated por­tal called TReDS. M1Xchange is a TReDS por­tal where banks will bid for fi­nanc­ing of re­ceiv­ables of MSMEs and ba­sis the best bid the MSME will get the pay­ment in­stantly. Pay­ments from large cor­po­rates will be col­lected on due date by the ex­change. The banks bid for rate of in­ter­est ba­sis the credit rat­ing of large cor­po­rates and this en­ables the flow of funds to MSMEs at rate of in­ter­est ap­pli­ca­ble to their cor­po­rate cus­tomers. This is a unique model launched in In­dia for first time which en­ables fi­nanc­ing trans­ac­tions be­tween many to many stake­hold­ers and not get lim­ited to a sin­gle bank.

The ma­jor ben­e­fits for MSMEs are: • TReDS en­sures quick avail­abil­ity of

fi­nances to the sup­pli­ers at fa­vor­able rates. • TReDS por­tal sup­ports a has­sle-free and pa­per-less doc­u­men­ta­tion of the pay­ment, hence, it saves time and cost. • There will be sub­stan­tial sav­ings and ad­e­quate cash flow smoothens the re­la­tion­ship of sup­pli­ers with their buy­ers. • There will be avail­abil­ity of busi­ness to banks with­out min­i­mal cost of busi­ness man­age­ment.

What is the mech­a­nism that is now avail­able un­der TReDS to un­der­take the ac­tiv­ity of dis­count­ing of in­voices and bills of ex­change?

The par­ties in­volved in this plat­form are MSME sell­ers, cor­po­rate buy­ers and fi­nanciers. All the par­tic­i­pants are pro­vided with the sys­tem to up­load, ac­cept, dis­count, trade and set­tle the in­voices on a dig­i­tal plat­form. The par­ties and the TReDS are bound by one-time mas­ter agree­ment. The process is ini­ti­ated with sell­ers up­load­ing the in­voice on the por­tal, which is fol­lowed by the buyer ap­prov­ing it, by log­ging into the TReDS plat­form. Af­ter the buyer’s ap­proval, the in­voice is then con­verted into a fac­tor­ing unit and is made avail­able to the fi­nanciers for bid­ding. Com­pet­i­tive prices are of­fered by the banks. The best price is then cho­sen by the seller. MSMEs and cor­po­rate buy­ers can view both of their in­for­ma­tion on this plat­form and bankers are pro­vided with fil­tered in­for­ma­tion to sup­port the dis­count­ing of in­voices for their re­spec­tive clients. To en­sure the au­then­tic­ity of the en­tire process, ran­dom au­dits are done.

Which are the 3 play­ers al­lowed to launch TReDS ex­changes? Has M1Xchange com­pleted the de­vel­op­ment of the plat­form and started its op­er­a­tions?

The 3 play­ers that have set up TReDS ex­changes are Mynd So­lu­tions (M1Xchange), A. TREDS and RXIL. M1Xchange has com­menced full op­er­a­tions with ef­fect from April 2017. The re­sponse from MSMEs has been phe­nom­e­nal as they are pass­ing on risk of col­lec­tion from large cor­po­rates to the banks act­ing as fi­nanciers on the plat­form. There have been in­stances where MSMEs have been able to ex­pand their busi­ness with large cor­po­rate as the pay­ment for their in­voices is re­leased in­stantly. They love the con­cept of one time on-board­ing and man­ag­ing the en­tire life­cy­cle of trans­ac­tions in dig­i­tal mode with auto pay­ment in their bank ac­count.

Do you think there is need for more such ex­changes as In­dia has a huge num­ber of MSMEs?

Al­most all the trade re­lated trans­ac­tions have al­ready been dig­i­tized or are in the process of get­ting dig­i­tized. It is only the adop­tion by var­i­ous stake­hold­ers that is tak­ing time. The banks and fin­techs are fine-tun­ing these pro­cesses in dig­i­tal for­mats and mak­ing it more at­trac­tive for the stake­hold­ers. This will im­prove the adop­tion of dig­i­tal way of do­ing trade trans­ac­tions. This dis­rup­tion is hap­pen­ing glob­ally and In­dia is one of the front run­ners in this ini­tia­tives un­der the aegis of RBI.

In this era where fi­nance is rid­ing the wave of tech­nol­ogy, there are nu­mer­ous ex­am­ples like e-wal­lets and loan ag­gre­ga­tors, where fin­techs and banks to­gether are ser­vic­ing the grow­ing needs of busi­ness and re­tail cus­tomers. Hun­dreds of small sell­ers have been funded based on their rat­ing and past track-record on the por­tals. In the nor­mal sce­nario, it would not

have been pos­si­ble to reach out to so many sell­ers, make de­tailed credit ap­praisals, cre­ate charge on col­lat­er­als and fund them in such a short turn­around time of 2-3 days.

The cur­rent in­dus­try size is ex­pected to be be­tween 30,000 to 50,000 crore. RBI has been metic­u­lous in its en­deavor to grant li­censes to 3 dif­fer­ent en­ti­ties with their own ex­per­tise and skill sets. All the 3 have the ca­pac­ity and ca­pa­bil­ity to en­sure that TReDS is a suc­cess story. We ex­pect the in­dus­try to grow man­i­fold in the near fu­ture.

How does M1Xchange dif­fer from the other play­ers? How many cus­tomers you have been able to at­tract so far?

M1Xchange is built on the con­cept of so­lu­tion based ap­proach to client needs. This ap­proach is pos­si­ble with right use of the dig­i­tal plat­form. The best prac­tices fol­lowed in in­dus­try have been im­ple­mented on the plat­form that makes the process ro­bust in le­gal par­lance. The ease of us­age of the plat­form within le­gal pa­ram­e­ters is the key ob­jec­tive fol­lowed by M1Xchange. More than 100 trans­ac­tions have been ac­com­plished on the ex­change and the vol­ume is grow­ing by more than 60% month on month. Banks and their teams have adapted to the dig­i­tal way of fi­nanc­ing on M1Xchange. They are en­joy­ing the growth in their busi­ness with­out hav­ing to worry about client re­la­tion­ship man­age­ment and back end pa­per­work that is other­wise re­quired.

The ex­change is a plat­form where cor­po­rates, sup­pli­ers and fi­nanciers con­verge. Can you ex­plain the cru­cial as­pects the plat­form would un­der­take?

The im­por­tant as­pects han­dled on ex­change are:

• En­abling the flow and ap­proval of trans­ac­tions that can be legally en­forced as per In­dian laws in­clud­ing In­for­ma­tion Tech­nol­ogy Act, Pay­ment and Set­tle­ments Act and Ne­go­tiable In­stru­ments Act.

• En­abling the one time on board­ing process and KYC for the par­tic­i­pants on the ex­change

• En­abling the flow of trans­ac­tion dig­i­tally with­out phys­i­cal move­ment of in­voices and re­lated doc­u­ments • Pro­vid­ing the sen­ti­ment – flow of funds to all par­tic­i­pants at all stages of trans­ac­tion All the trans­ac­tions on ex­change are en­abled as pri­or­ity sec­tor lend­ing.

At present, only banks and a few NBFCs are al­lowed to be fi­nanciers on the plat­forms. Do you think this is con­straint for op­er­a­tors like you?

Fin­techs are sup­port­ing the en­tire bank­ing ecosys­tem to trans­form and en­hance the speed of serv­ing cus­tomers. The speed of in­no­va­tion and its im­ple­men­ta­tion has grown man­i­folds with de­ploy­ment of tech­nol­ogy in fi­nan­cial world by fin­techs.

The plat­form has been en­vis­aged to ben­e­fit MSMEs. We do not find any con­straints in work­ing with banks and NBFCs be­cause they of­fer lower in­ter­est rates as com­pared to pri­vate in­vestors. To make this con­cept a suc­cess, aware­ness needs to be spread in the mar­ket.

There are re­ports that some of the in­tended par­tic­i­pants have reser­va­tions on mak­ing their in­voices avail­able on the plat­forms be­cause of con­fi­den­tial­ity con­cerns. There are also other con­cerns that may im­pact the suc­cess of the sys­tem.

The con­cern of par­tic­i­pants about the con­fi­den­tial­ity of in­for­ma­tion on ex­change is un­war­ranted. The trans­ac­tion is vis­i­ble only to the spe­cific par­tic­i­pants of the trans­ac­tion i.e. MSME and his cor­po­rate buyer. Once the trans­ac­tion is fi­nanced the in­for­ma­tion is not vis­i­ble to other fi­nanciers there­after. For M1Xchange con­fi­den­tial­ity is the pri­mary ob­jec­tive and all the best IT prac­tices have been fol­lowed to en­sure the ro­bust­ness.

What are the fur­ther mea­sures re­quired to make the op­er­a­tions of MSMEs vi­able?

The mea­sures re­quired to make the op­er­a­tions of MSMEs vi­able are: on-board­ing pub­lic sec­tor un­der­tak­ings and gov­ern­ment de­part­ments on the plat­form as large cor­po­rates; on-board­ing more banks on the plat­form will drive down the in­ter­est rate; and a cred­i­ble short-term rat­ing of MSMEs will be gen­er­ated by the plat­form which can be used by the banks for lend­ing money with­out has­sles

What is the tech­nol­ogy in­fra­struc­ture M1Xchange has cre­ated?

The tech­nol­ogy in­fra­struc­ture has been de­signed keep­ing in mind the fol­low­ing key as­pects:

• Se­cu­rity – Mul­ti­ple lay­ers of se­cu­rity with net­work com­po­nents and se­cu­rity so­lu­tions have been added to se­cure the data hosted on the plat­form. Apart from the log­i­cal se­cu­rity, the in­fra­struc­ture is hosted at lo­ca­tions which have mul­ti­ple lev­els of phys­i­cal se­cu­rity.

Scal­a­bil­ity – Net­work com­po­nents have been put in place to en­sure that the in­fra­struc­ture can be scaled up or down hor­i­zon­tally as well as ver­ti­cally de­pend­ing on the trans­ac­tion vol­umes Avail­abil­ity – Re­dun­dant net­work com­po­nents, servers, con­nec­tiv­ity, and power source have been con­sid­ered while de­sign­ing the in­fra­struc­ture. Best in class DR so­lu­tion has been im­ple­mented to en­sure that there is near zero data loss even in case of a dis­as­ter. Per­for­mance – The in­fra­struc­ture has been de­signed to cater to the pro­jected vol­umes and thor­ough per­for­mance and load test­ing has been per­formed so that the ap­pli­ca­tion per­for­mance does not de­grade even at the peak vol­umes. Pro­cesses – Pro­cesses have been de­fined to mon­i­tor, reg­u­larly au­dit and con­tin­u­ously im­prove and op­ti­mize the over­all in­fra­struc­ture so­lu­tion.


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