TReDS platforms enter discussions with insurers post RBI nod

after Reserve Bank of India (RBI) allowed Insurance companies To gain access to the TReDS (Trade Due Discount System) platforms earlier this month, players began discussions with insurance companies. However, they expect a gradual take-off.

The TReDS platforms have largely been approached by 2-3 general insurers who have secured approval from the Insurance Regulatory and Development Authority of India (IRDAI) for their credit insurance product and are now looking to integrate their products with the platforms, industry players said. .

Discussions with insurance companies

We are in talks with insurance companies. Initial interest is limited but 2-3 insurers have applied, and we expect that once operations start, we will see more interest,” said Prakash Sankaran, Managing Director and CEO of Invoicemart.

However, the integration of back-end technology, the digital upgrade of both TReDS and insurers, caution on the part of insurers and financiers, and the development of NACH (National Automated Clearing House) debit and credit capabilities for insurers ensure that roll-outs are slow and implemented through pilot projects or sandbox policy.

Globally, it is a large market with 30-40 percent trade finance backed by insurance. “In India, it will take some time for this market to develop,” said Ketan Gaikwad, Managing Director and CEO of Receivables Exchange India Limited (RXIL).

Market development

As they become accustomed to the ecosystem, insurers may initially look to cover companies with higher ratings to ensure profitability and security. However, they are expected to focus on lower-rated companies, which have a greater need for collateral, as financiers do not usually require insurance against good companies.

“Till now, banks discount invoices mostly for A-class customers and higher-rated customers. Lower-rated companies were not getting credit penalties and their suppliers’ bills could not be discounted. Companies of M1xchange could not be discounted. Insurance will bring liquidity to the platform because risks can now be shared by them.

Mohindro said the insurance coverage will depend on the risks that the insurance companies are willing to take, regardless of the size of the SMEs (Small and Medium Enterprises) and their dues, adding that all SMEs that supply that particular company will benefit from the insurance coverage.

Typically, around 60 per cent of TReDS financing is allocated to micro and small enterprises with a turnover of less than Rs.50 crore, while 40 per cent is allocated to medium-sized entities with a turnover of Rs.50-250 crore.

insurance coverage

“Ticket size ranges from $10 to ₹5,000 crore. We expect the insurance coverage ratio to be around 80-85 per cent, depending on how insurance companies insure businesses,” Sankaran said. Another important aspect is the risk premium as It may play a role in determining the attractiveness of a credit insurance product.

Default rates and risk management

While the default rate in TReDS is currently minimal, opening up the world to low-rated companies through insurance cover is expected to increase the size of the overall risk, prompting caution on the part of insurers.

Over the past 5 years, TReDS has funded more than INR 1.6 crore of which Rs 400-450 crore payments were in deficit. Of this, Rs 250-300 crore relates to one large company, Future Group, except for which the default values ​​are around Rs 150-180 crore – a default rate of around 0.1 per cent.

RXIL, which was the first TReDS platform to launch a trade credit insurance sandbox on the platform in November 2020, expects to see insurance coverage of about 10 percent of current volumes.

“We are currently preparing volumes of INR 3,200 crores per month. First of all, we see insurance coverage of around 10 per cent of bills or INR 400-500 crores per month by the end of FY24,” said Gaikwad, adding that the borrowing will be Slow as insurers go through payment cycles of test cases to assess the functionality of TReDS and the success rate of defaults.