TREDS Platform Operators Welcome RBI’s Directive To Ease MSME Invoice Discounting, Boost Liquidity

TREDS Platform Operators Welcome RBI’s Directive To Ease MSME Invoice Discounting, Boost Liquidity

On Wednesday, the Reserve Bank of India (RBI) issued a direction to TReDS operators and participants to allow transaction insurance. This guideline comes four months after the RBI proposed including insurance firms in its Trade Receivables Discounting System (TReDS) to promote buyer invoice financing regardless of credit rating.

"Financiers submit their proposals on the TReDS platforms taking the creditworthiness of the buyers into consideration. They typically don't want to bid on payables from buyers with low ratings. To address this, an insurance option is being made available for TReDS deals, which will help financiers manage their exposure to default risk, according to a notification from the RBI.

In addition, based on the buyer's grade, financiers such as banks, NBFCs, along with others offered discounted bids on the invoice. Typically, lenders will only extend loans to borrowers with credit ratings of AA, AAA, and higher to avoid doing business with those whose scores are less than BBB.

The insurance firms will step in at this point and, after conducting their due research on the buyer as well as the business that they're in, will offer the coverage. The premium will vary depending on the risk they are incurring, Ketan Gaikwad, the managing director and CEO of RXIL, told FE Aspire. RXIL is one of the four TReDS providers that the RBI has authorized, along with M1 Xchange, Invoicemart, and C2FO.

RBI's decision creates a notable market potential for insurance businesses in the area of trade credit insurance, claims M1xchange CEO Sundeep Mohindru. Additionally, insurance businesses don't need to set up their sales organization to generate revenue out of it because a rising number of consumers and sellers are using TReDS networks for invoice discounting.

"As a result, they naturally attract business, which significantly lowers the price of doing business. Additionally, insurance firms can determine the repayment behaviour of customers and base their risk assessment on that information thanks to the abundance of data patterns that have been collected over time on TReDS, according to Mohindru.

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