RBI allows all factors to participate as financiers on TReDS platforms

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

The Factoring Regulation Act, 2011 (FRA) allows certain other entities/institutions to conduct factoring transactions. Accordingly, all entities/institutions permitted to carry out factoring business under the Financial Supervision Act and the rules/regulations issued thereunder are now allowed to participate as financiers in TReDS,” according to the central bank notification.

TReDS transactions fall under the scope of “factoring business”, and currently only banks, NBFCs and other financial institutions can be financing.

The Reserve Bank of India (RBI) has also allowed an insurance facility for TReDS transactions to help financiers hedge against default risk. This is because financiers usually place their bids with buyers’ credit rating in mind, and are not inclined to bid for low-rated buyers’ creditors.

Insurance companies on TReDS

As a result, insurance players will now become the fourth participant on the TReDS platforms, as well as sellers, buyers and SME financiers.

TReDS platform operators will need to decide at what stage the insurance facility can be utilized. Moreover, no insurance premium can be charged to MSME sellers, premium collection and related activities will be enabled through the National Automated Clearing House (NACH) system.

“Based on approval from financiers and insurers, TReDS platforms can facilitate automated processing of insurance claims and set schedules for their settlement through the NACH system. Until now, credit insurance will not be treated as a credit risk mitigation factor (CRM) to take any prudential benefits .

factoring units

While TReDS guidelines mandate that discounted or funded factoring units have a secondary market, these are not yet introduced. The central bank said that given the experience gained so far, operators of TReDS platforms can, at their discretion, enable a secondary market for the transfer of financial units within the same TReDS platform.

TReDS platform operators have also been allowed to settle all factoring units — funded, discounted or otherwise — using the NACH mechanism, with set time schedules for funds settlement. This is to overcome the inconvenience caused by MSMEs and to improve settlement, since about 17 percent of factoring units charged are not discounted or funded and buyers need to pay MSME sellers outside the system.

To ensure transparent and competitive bidding by funders, TReDS platforms will be required to display details of bids submitted for the factoring unit to other bidders; Without revealing the name of the model.

Three entities – A.TREDS (Invoicemart), Receivables Exchange of India (RXIL) and Mynd Solutions (M1 Stock Exchange) operate the three TReDS platforms in the country; Whereas C2FO Factoring Solutions was granted permission in principle.