Solv­ing liq­uid­ity woes of MSMEs

M1x­change, an RBI-li­censed TR eDS plat­form, fa­cil­i­tates fi­nanc­ing of trade re­ceiv­ables of small firms,

Business Standard - - START-UP CORNER - writesNir­malya Be­hera

You drop in at any sem­i­nar or work­shop de­lib­er­at­ing on MSMEs (mi­cro, small & medium en­ter­prises) and one in­evitable point that comes up for dis­cus­sion is ad­dress­ing the fi­nanc­ing needs of the sec­tor.

The MSME sec­tor, which gen­er­ates the most num­ber of jobs af­ter the agri­cul­ture sec­tor, con­tin­ues to face con­straints in ob­tain­ing ad­e­quate fi­nance, es­pe­cially in terms of their abil­ity to con­vert trade re­ceiv­ables into liq­uid funds.

For fa­cil­i­tat­ing the fi­nanc­ing of trade re­ceiv­ables of MSMEs from cor­po­rate buy­ers through mul­ti­ple lenders, the Re­serve Bank of In­dia (RBI) has in­tro­duced the Trade Re­ceiv­ables Dis­count­ing Sys­tem (TReDS).

M1x­change, run by Gu­ru­gram-based Mynd So­lu­tions, is one of the three hold­ers of TReDS li­cences is­sued by the RBI and acts as an ex­change to fa­cil­i­tate the fi­nanc­ing of trade re­ceiv­ables through ‘fac­tor­ing’ or ‘in­voice dis­count­ing’ by ex­ter­nal fi­nanciers.

The com­pany founded by Sun­deep Mo­hin­dru has raised Series-A fund­ing from May­field In­dia and SIDBI Ven­tures for an undis­closed amount. It is for the first time that any TReDS plat­form has re­ceived PE fund­ing. The other two TReDS li­cence hold­ers are In­voice­mart, owned by A.TREDS, a joint ven­ture of Axis Bank and mjunc­tion ser­vices, and Re­ceiv­ables Ex­change of In­dia (RXIL), a joint ven­ture of the NSE and SIDBI (Small In­dus­tries De­vel­op­ment Bank of In­dia).

“The RBI and the govern­ment, through the TReDS, have cre­ated a highly in­no­va­tive plat­form that will al­low MSMEs to se­cure fi­nanc­ing at the low­est pos­si­ble cost. We are ex­cited to part­ner with Sun­deep and the en­tire team at M1x­change, which has emerged as the mar­ket leader in the TReDS space. This in­vest­ment con­tin­ues to be in line with our fo­cus on the Fin­tech sec­tor in In­dia,” said Vikram Godse, man­ag­ing part­ner, who will join the board of di­rec­tors to rep­re­sent May­field.

Ear­lier, the pro­mot­ers and SIDBI Ven­ture Cap­i­tal Funds had in­vested ~25 crore in the start-up.

Pro­duct­con­cept

The TReDS al­lowsMSMEs to re­ceive money up­front, which helps them re­solve their col­lec­tion-re­lated and work­ing cap­i­tal is­sues. MSMEs seller, cor­po­rate buy­ers, banks and non-bank­ing fi­nan­cial com­pa­nies (NBFCs) are the di­rect par­tic­i­pants in the TReDS.

“An MSME sup­ply­ing goods and ser­vices to a large cor­po­rate has a re­ceiv­able from that big com­pany. The MSME can put its in­voice on the M1x­change and the large cor­po­rate could choose to ac­cept the in­voice and pay on, say, the 45th day, as per the credit terms. The banks on the ex­change will then bid to dis­count that in­voice. Based on the best bid, the MSME will get in­stant pay­ment from the fi­nanc­ing bank. The cor­po­rate will make pay­ment to the bank on the due date. The rate of in­ter­est MSME will get is based on the good­will of the large cor­po­rate. In this process, banks are es­sen­tially tak­ing credit risk on large cor­po­rates and not on MSMEs," says Mo­hin­dru.

Trad­ing on the plat­form also helps banks in meet­ing their pri­or­ity sec­tor lend­ing tar­gets. The in­ter­est rate charged by banks on the dis­counted amount is around 9 per cent per an­num, but it is neg­li­gi­ble when cal­cu­lated on pro-rata ba­sis tak­ing into ac­count the num­ber of days for re­pay­ment of the bills by large cor­po­rates.

Op­por­tu­ni­ties

The man­ual bill dis­count­ing mar­ket is es­ti­mated at ~30,000 crore or about $42,162 mil­lion a year. “The gap in fund­ing for the MSME mar­ket is ap­prox­i­mately ~ 4 tril­lion and it can be wellad­dressedby this prod­uct,” Mo­hin­dru says.

There have been mul­ti­ple tail­winds for TReDS ex­changes such as the Min­istry of Fi­nance man­dat­ing all PSUs to join the TReDS, qual­i­fi­ca­tion of ad­vances un­der the TReDS as pri­or­ity sec­tor lend­ing for all par­tic­i­pat­ing banks, con­sid­er­a­tion of the wi­den­ing of the def­i­ni­tion of MSMEs to the sys­tem more in­clu­sive and the Prime Min­is­ter’s lat­est an­nounce­ment that all cor­po­rates with a turnover ex­ceed­ing ~500 crore must reg­is­ter on the TReDS.

On rev­enue streams, Mo­hin­dru, who is also CEO of M1x­change, says, “As the un­der­ly­ing en­ti­ties are the same (MSMEs, govern­ment de­part­ments, PSUs and cor­po­rates as buy­ers), the TReDS plat­form can deal with both re­ceiv­ables fac­tor­ing as well as re­verse fac­tor­ing. It charges a one-time reg­is­tra­tion fee from par­tic­i­pants, along with a per­cent­age of the trans­ac­tion value as a trans­ac­tion fee.” The to­tal vol­ume of trans­ac­tional value at M1x­change has gone past ~2,000 crore since it started op­er­a­tions in Oc­to­ber 2017. It ex­pects to break even in FY20.

M1x­change founder Sun­deep Mo­hin­dru

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