Home / Opinion / Columns /  The Goa government’s TReDS adoption is worthy of emulation

Economists and policymakers are unanimous in their desire to see improvement in the access that micro, small and medium enterprises (MSMEs) have to finance. The Union government had taken several measures to improve the working capital situation for small businesses. The MSME Development (MSMED) Act of 2006 provides for the naming and shaming of large buyers that don’t pay small businesses on time for goods procured or services received. MUDRA loans were designed to widen credit availability. The Emergency Credit Line Guarantee Scheme of the Centre stimulates the extension of new credit to small businesses.

The Reserve Bank of India (RBI) had steered the launch of the Trade Receivables Exchange system, wherein small businesses can get invoices accepted by their buyers discounted and receive payments from financial institutions that will collect the receivables on their due dates. On its part, the government has made it mandatory for companies with a turnover of 500 crore or more to get registered on the TReDS platform. The Government’s e-Marketplace (GeM) is automatically linked to TReDS. That is, invoices raised for procurements made by the government through the GeM can be easily discounted on TReDS platforms and payments collected by small suppliers. However, many big government procurers lie outside TReDS coverage. It is in this milieu that an initiative taken by the Goa government assumes significance.

The economy of India’s favourite beach destination depends on tourism, with 40% of its population directly or indirectly dependent on it. Diminished tourism revenues due to pandemic-induced lockdowns and travel restrictions had severely impacted the cash flows of small businesses. Further, many were engaged in work for government agencies, with significant receivables. But payments were delayed because the state government itself was dealing with its own set of problems.

As MSMEs struggled to survive, tax collection rates in Goa took a dip. This led to a vicious cycle: some of MSMEs’ largest bills were for government agencies that were short of money to pay on time. This situation prompted the Goa government to take action that was radical and technology driven. It partnered with Receivables Exchange of India Ltd (RXIL) to get onboarded as a ‘Buyer’ on this platform and became the first state government to do so. As ‘buyer participants’, state agencies have a one-stop portal to clear pending invoices. The TReDS system works on the principle of invoice factoring: Buyers can clear MSME invoices on time with the help of online bidding by multiple financiers (factors) on the TReDS platform via an auction mechanism that helps ensure the prompt realization of trade receivables at competitive market rates and better tenures. This addresses two issues facing MSMEs. One, it enables the prompt encashment of receivables. Two, factors have no recourse to MSMEs if they don’t get paid on the due date. The credit risk is borne by factors.

Once adopted, Goan MSME sellers received the cash flows they needed on time, while the government, as the buyer, was able to make payments on favourable terms and avail the support of financiers, including banks, to ensure timely payments to MSMEs in need. The Goa government reached out to RXIL as early as August 2020. The government’s requirements were straightforward. It was looking for a way to both improve the liquidity conditions of MSMEs facing lockdown hardships and to fulfil its invoice obligations.

During the on-boarding process, it was found that the state government’s needs could best be fulfilled by joining the TReDS platform as a buyer. Pending MSME invoices would be put up on the platform for state agencies to authorize these pending invoices and make payments rapidly through the system. The Goa government’s first transaction on the network took place in October 2020. Since then, over 575 crore of MSME funds have been cleared via the TReDS platform, helping over 250 MSMEs and delivering a valuable additional source of working capital to small businesses.

Being on the TReDS platform helps Goa’s government get extended payment terms, up to 180 days. Multiple financiers allocate limits and bid on invoices at competitive rates. It enables timely settlement of MSME dues without immediate expenditure from the state’s treasury. Finally, automated repayments to financiers are triggered on due dates. This is an important element in the process. State governments have to agree to this and allow this to happen, so that they could maintain their credit standing with RBI and the Union government.

Thanks to the Goa government’s timely decision to join the TReDS platform when the survival of many MSMEs was in question, the state administration was able to leverage the system to get cash into their hands exactly when it was needed. It is time for other states, Union ministries and large corporate buyers to emulate the Goa government’s move. They may be pleasantly surprised by the benefits it unleashes (higher tax receipts is just one of them) as the improved finances of MSMEs, their owners and workers boost economic activity.

V. Anantha Nageswaran & Ketan Gaikwad are, respectively, a distinguished visiting professor of Krea University, and managing director and chief executive officer of Receivables Exchange of India Ltd.These are the authors’ personal views.

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