Of the challenges faced by Micro, Small and Medium Enterprises (MSMEs), the challenge of the ‘financing gap’ pinches the most. This challenge, which represents a ‘capital gap’ for MSMEs to pursue growth strategies, has wide ramifications for the nation’s development since MSMEs contribute to 30% of India’s GDP, besides their valuable contribution to employment and exports. The size of the credit gap for developing country SMEs, as estimated by the International Finance Corporation (IFC), was approximately $5 trillion—1.3 times the level of current MSME lending. Women-owned MSMEs were fewer and accounted for more than 32% of the gap.
Most SMEs and entrepreneurs look towards traditional bank finance as external sources of credit to plug their financing needs. Yet the risk-return profile of these enterprises is ill-suited for such finance, especially during specific stages in their life cycle when there is a lack of credit history and proven track records, and a greater reliance on intangibles (which can’t be collateralised) as part of their business models. The need to show robust business plans and good sales turnover may also contribute to the challenges in obtaining credit through the traditional routes.
The Reserve Bank of India’s report on Trend and Progress of Banking in India 2021 (p. 87) notes that the total number of MSME accounts with all Indian Scheduled Commercial Banks (SCBs) in 2020–21 was a mere Rs 420.19 lakh, with the amount of credit flow outstanding to such MSMEs being Rs 17,83,924.8 crore. Such data juxtaposed with the overall credit by SCBs in India in March 2021 suggests that MSMEs accounted for a mere 14% of the overall number of loan accounts with Indian SCBs in 2020–21 (at 29.9 crore accounts) and a mere 16% of the overall amount of credit flow outstanding of Rs 1,09,12,317 crore. Clearly, banks can’t be relied upon to help MSMEs act as the change agents for India’s development.
The Trade Receivables Discounting System (TReDS) was an innovative alternative financing method launched by the Reserve Bank of India in 2017, with a view to facilitate financial inclusion of the Indian MSME sector. The TReDS is an electronic platform for financing/discounting trade receivables of MSMEs, both in the form of invoices and bills of exchange, drawn on large corporates, Public Sector Units, and government departments. With banks and Non-Banking Financial Companies (NBFCs) undertaking the financing through a competitive invoice auctioning mechanism, MSMEs can avail short-term credit at competitive interest rates with multiple financiers, which provides them a bargaining power hitherto unimagined. The process flow and the settlement process have been designed to ensure speedy settlements between financiers and MSMEs for accepted bids on a T+2 basis.
The government has mandated that all companies with a turnover of Rs 500 crore and above go onboard the TReDS platform. The Government’s e-Marketplace (GeM) is also automatically linked to TReDS, helping MSMEs collect payments due for procurements made by the government.
The TReDS has been partially successful in achieving its goal of financial inclusion by providing an alternative to the difficult bank financing route. There has been a growth in the financing of trade receivables of MSMEs through the TReDS platform. Thus, during 2020–21, a total of 8,61,560 invoices amounting to Rs 19,669.84 crore were uploaded. Of these, 7,86,555 invoices (91.3% of those uploaded) were financed, with the amount financed being 86.8% of the invoices uploaded (amounting to Rs 17,080.14 crore). In 2020–21, there was a growth in the invoices uploaded and financed through the platform by more than 62%—a testament to the success of the innovative financing mechanism.
However, what is needed is greater onboarding of more MSME sellers, public sector enterprises as well as state governments on the TReDS. Of the three TReDS platforms authorised by the RBI to operate, Receivables Exchange of India (RXIL), in its Annual Report for 2021, reported a total of 5,300 MSME sellers registering on the platform. RXIL was the largest TReDS platform in terms of volume of business, crossing `10,000 crore in March 2021. M1xchange, on its website, claims that it has helped more than 9,800 MSMEs, mainly from Tier 2 and Tier 3 cities. With the number of MSMEs in India in March 2022 being more than 79.27 lakh, it is clear that TReDS has to be more widely adopted by MSME sellers.
The situation is equally uninspiring from the corporate and PSU buyers’ end. According to the information available from the MSME ministry, only 35.2% of the 4,714 large companies with a `500 crore turnover each (as identified by the Ministry of Corporate Affairs in April 2021) were registered on TReDS as of April 2022. It would appear that even such registration was on account of fulfilling compliance norms, since most companies had not actually started transactions. The CPSEs trading on TReDS is also not 100%. As of 2020, only 175 of the Public Sector Enterprises were on TReDS.
MSME financing will need to be paid greater attention to. The RBI is well advised to make all MSME buyers and sellers mandatorily participate in TReDS. This will resolve, to a large extent, the long-standing MSME financing woes.
Tulsi Jayakumar
Professor, Economics, Bhavan’s SPJIMR
(The author is also Executive Director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR)
(Views are personal)
(tulsi.jayakumar@spjimr.org)