TReDS Mandate Expansion: How the ₹250 Crore Turnover Threshold is Set to Empower MSMEs with Faster Payments and Improved Liquidity

Introduction

In a pivotal step towards strengthening the liquidity and operational efficiency of Micro, Small, and Medium Enterprises (MSMEs), the Indian government has expanded the Trade Receivables Discounting System (TReDS) mandate. Announced on November 7, 2024, the new notification requires businesses with an annual turnover of ₹250 crore or more to register on the TReDS platform. Previously, the threshold was set at ₹500 crore, making this a significant move towards enhancing the financial ecosystem for smaller and mid-sized companies.

What is TReDS and Why is it Important?

TReDS is an innovative electronic platform designed to enable MSMEs to get immediate access to funds by discounting their trade receivables. Traditionally, MSMEs have faced issues related to delayed payments, which hampers their ability to sustain operations, pay employees, and invest in business growth. TReDS solves this problem by allowing MSMEs to auction their invoices from buyers (mostly large corporations or public sector undertakings) to a network of financiers. These financiers provide immediate funding at a discounted rate, which helps MSMEs overcome the challenge of long payment cycles.

TReDS serves several critical purposes:

1. Accelerates Payment Cycles: It minimizes the payment delay experienced by MSMEs, allowing them to maintain healthy cash flows.
2. Improves Liquidity: MSMEs can gain immediate access to working capital by discounting their receivables.
3. Provides Transparency: The system is entirely digital, ensuring transparency in transactions and reducing the likelihood of disputes.

Key Features of the New TReDS Mandate

1. Reduction in the Turnover Threshold

The most notable change in the new mandate is the reduction in the turnover threshold from ₹500 crore to ₹250 crore. This change significantly expands the pool of companies that will be required to register on TReDS, thus ensuring that a larger number of MSMEs can benefit from faster payment cycles.

2. Impact on Different Sectors

The mandate applies to the following entities:

• Corporates: Businesses with a turnover of ₹250 crore or more must now register on TReDS.
• Public Sector Undertakings (PSUs): These are large buyers who often have long payment cycles that delay cash flow to MSMEs.
• Large Buyers: Any other large entities that regularly engage in transactions with MSMEs will now be required to join the TReDS platform.

This change ensures that a broader range of MSMEs will now have access to improved liquidity, directly addressing long-standing concerns around payment delays in India’s business ecosystem.

3. Broader Coverage for MSMEs

This amendment to the TReDS mandate brings an even wider array of MSMEs under its scope. Businesses with turnover below ₹250 crore but higher than smaller MSMEs are now eligible to benefit from the fast-track payments facilitated by TReDS. The additional MSMEs that now qualify for registration will experience a direct improvement in their financial stability and growth prospects.

Why the TReDS Mandate Matters for MSMEs

The primary challenge for MSMEs in India has always been the issue of delayed payments. In many cases, MSMEs must wait for months before they receive payment from large buyers, disrupting their cash flow and stalling growth initiatives. This issue of delayed payments is even more challenging for MSMEs with limited access to working capital.

The introduction of the TReDS mandate addresses this challenge by offering MSMEs a platform to auction their trade receivables to multiple financiers. As a result, MSMEs can secure immediate funds and improve their liquidity. Let’s take a closer look at why this change is so significant:

1. Ensures Timely Payments to MSMEs

MSMEs often face the problem of delayed payments, which creates cash flow issues that can affect their daily operations. Under the TReDS system, these businesses can access immediate payments for their receivables, reducing the stress of waiting for buyers to settle invoices.

By expanding the scope to include businesses with turnover of ₹250 crore or more, the government ensures that more MSMEs will have access to faster payments, helping them to keep their operations running smoothly without disruptions.

2. Promotes Financial Inclusivity for MSMEs

By lowering the turnover threshold, the government has included mid-sized businesses within the TReDS framework, fostering financial inclusivity for a larger section of MSMEs. Previously, only companies with turnover above ₹500 crore were covered, leaving out many mid-sized companies that play an equally important role in the economy. Now, these businesses will also benefit from quicker access to working capital, helping them grow and contribute to the economy.

3. Aligns with India’s Digital Transformation Goals

The TReDS platform is a fully digital system, which aligns with the government’s larger vision of digital financial inclusion. By pushing more businesses to embrace the platform, the government is fostering greater transparency, efficiency, and scalability within the Indian financial ecosystem. This digital push is expected to not only make MSME financing more accessible but also reduce friction in business transactions.

4. Strengthens Buyer-Supplier Relationships

The introduction of TReDS provides a unique opportunity for companies to build stronger relationships with their MSME suppliers. Large buyers using the TReDS system ensure that their suppliers receive timely payments, which fosters trust and promotes long-term collaboration. This relationship, built on mutual benefit, is likely to result in sustained business partnerships that drive growth for both parties.

How Does TReDS Work? A Step-by-Step Process

To better understand the benefits of the TReDS system, let’s explore the step-by-step process involved in how MSMEs can use it:

Step 1: Onboarding the MSME Supplier

The MSME registers on the TReDS platform and uploads invoices that are pending payment from buyers. These invoices are then available for financiers to bid on.

Step 2: Auctioning the Invoice

Financiers (usually banks, NBFCs, or other financial institutions) place bids on the invoices, offering MSMEs immediate payment at a discounted rate. This competitive auction process ensures that MSMEs get the best possible terms.

Step 3: Immediate Funding to MSMEs

Once the invoice is auctioned, the MSME receives the funds within a short period, usually within 2-3 business days. This is a significant improvement over the traditional payment terms, which could take weeks or even months.

Step 4: Final Payment by the Buyer

On the due date, the buyer pays the full amount of the invoice directly to the financier, completing the transaction. The financier profits by retaining the difference between the invoice amount and the discounted amount paid to the MSME.

Example: How TReDS Helps MSMEs Get Paid Faster

Let’s look at an example to illustrate how TReDS works:

Scenario: XYZ Components, a small MSME, delivers goods worth ₹2,50,000 to ABC Industries. The payment terms require ABC Industries to pay within 45 days, but XYZ Components needs the money immediately to fulfill another order.

Step-by-Step Process:

1. Listing the Invoice
   XYZ Components uploads the invoice on the TReDS platform.

2. Bidding by Financiers
   A financier offers to pay XYZ Components ₹2,40,000 immediately, retaining ₹10,000 as a discount fee.

3. Immediate Funding
   XYZ Components accepts the financier’s offer and receives ₹2,40,000 in just 3 days.

4. Final Settlement
   On the due date, ABC Industries pays the full ₹2,50,000 directly to the financier.

Outcome:

• XYZ Components (MSME) gets quick access to funds to continue operations and take on additional orders.
• The Financier earns ₹10,000 as profit for providing early payment.
• ABC Industries (Buyer) complies with payment terms and strengthens its relationship with the supplier.

Conclusion: A Game-Changer for MSMEs

The ₹250 crore turnover amendment to the TReDS mandate is a game-changer for MSMEs in India. By addressing long-standing challenges related to delayed payments and liquidity, this initiative offers a much-needed financial lifeline for businesses that are crucial to India’s economy.

The TReDS platform is more than just a regulatory requirement for businesses; it is an opportunity for MSMEs to improve their cash flow, strengthen relationships with suppliers, and contribute to India’s growth. The government’s decision to broaden the scope of TReDS by lowering the turnover threshold is a forward-thinking move that will provide MSMEs with the tools they need to scale their operations and succeed in a highly competitive environment.

With greater financial inclusivity, enhanced liquidity, and improved payment cycles, MSMEs in India are well-positioned for growth and success in the coming years. As businesses adapt to this new mandate, the future of MSMEs in India looks brighter than ever before.