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After unveiling a pre-shipment financing solution on TReDS to empower MSMEs, Divyesh Dalal, Managing Director and Head– Global Transaction Services, SME and Institutional Liability Business, DBS Bank India is expecting that suppliers across key manufacturing sectors including auto, industrials, steel, apparel and retail, among others will benefit from this offering.
Both entities stated that this offering will be particularly relevant for MSMEs and SMEs across India, enabling them to enhance cash flows to fulfill orders even before goods are delivered to buyers. Notably, MSMEs contributed 45.56 per cent of total exports from April to September 2023 as per the Ministry of External Affairs report. Despite their sizeable share in trade flows, MSMEs often face challenges establishing favourable payment and credit terms with buyers, managing outflows, and obtaining the documentation required by formal lenders.
The pre-shipment financing solution enables the end-to-end financing of suppliers, encompassing both the pre and post-shipment stages. This is unlike traditional financing solutions which primarily cater to the post-shipment financing needs of suppliers only.
“The offering builds upon the industry-leading, digital trade financing capabilities of DBS Bank and enhances our ability to facilitate timely working capital to MSME suppliers. The digital offering enables faster decision-making (explained above) through external and partner-led data, which is market-leading and will also result in higher adoption due to shorter TATs,” said Dalal.
Talking about how pre-shipment financing solutions work compared to traditional post-shipment financing, Dalal stated that traditional post-shipment financing offered by banks entails funding against invoices accepted by the anchor. “In contrast, with the pre-shipment financing solution offered by DBS Bank India in partnership with RXIL, an MSME can apply for funding as soon as he secures the order from his buyer,” he noted.
Additionally, the seller needs funds to manufacture goods as per the purchase order and it's precisely for this purpose that the pre-shipment financing helps the MSME. The funding is provided against valid purchase orders issued by the buyer to the seller (for eg: MSME) resulting in end-to-end trade financing at one go. This is the unique selling point of this offering to MSMEs.
Feedback And Support
Dalal added that the company have been running the pre-shipment financing program for the key suppliers to some of the large anchor (buyer) clients. The feedback has been extremely positive, based on which we decided to pilot the post-shipment solution with a valued partner like RXIL, given the extensive supplier base on their platform, he added.
“Based on the response of these suppliers, we are open to customising the product offering further, as deemed necessary. This is part of our larger suite of offerings for SME customers that help time-strapped business owners capitalise on growth opportunities,” he told BW Businessworld.
This pre-shipment trade financing solution for SMEs will support their working capital requirements promptly, right at the purchase order stage thereby ensuring business continuity and timely delivery from suppliers to the anchor buyers. As part of the RXIL ecosystem, DBS Bank India will underwrite the trade financing facility applications of prospective SME suppliers.
Notably, alternative trade lending data from RXIL is used to build better borrower profiles to assess the risk and creditworthiness of suppliers instead of traditional documentation, which may often result in suppliers either being underfunded or being unable to access necessary working capital on time, the company informed.
Specific Criteria To Assess MSMEs’ Creditworthiness
The creditworthiness of an MSME is assessed partly based on publicly available information from various government and public external sources, along with key financial/credit metrics of the borrower.
He added, “By triangulating this data and leveraging DBS Bank’s digital capabilities, along with data available from RXIL, we can improve the speed and efficiency in the credit decisioning, documentation and disbursement process, which results in timely and adequate working capital access to suppliers.”
By obtaining financing for purchase orders even before invoices are generated and accepted, suppliers can mitigate cashflow mismatches in their working capital cycle and ensure the timely supply of products to their anchor buyers.
Meanwhile, to facilitate the financing and discounting of trade receivables of micro, small and medium enterprises (MSMEs) through multiple financiers, the Reserve Bank of India (RBI) introduced the TReDS in 2014. Since then, the volume of invoice discounting facilitated by TReDS has sparked discussions among industry insiders as many believe that this platform has failed to create meaningful volumes of invoice discounting.
While describing the drawbacks of TReDS, experts said that MSME suppliers' identity is a major concern for big companies as they believe that their competitors will be able to find out from where they source their materials. Apart from that large corporations prioritise providing lengthier credit terms to their suppliers and will not recover receivables within 45 days.
Earlier, the centre's public policy think-tank Niti Ayog in its report stated that while TReDS was “sound in theory as observed by the U K Sinha Committee, it failed to take off and establish a meaningful volume of invoice discounting." It stated that the shallow pools of financing capital and lack of corporate buyer incentives as the major reasons behind the slow growth.
Modi government has mandated that all companies with a turnover of Rs 500 crore and above should register on the TReDS platform, but there are various reasons for corporates not being interested in utilising the TReDS facility. There is a lack of any incentive for the corporate buyers to join TReDS and secondly, many corporate buyers already have their corporate treasury departments that operate their own reverse factoring programs for their supplier ecosystem.
In addition, only entities regulated by the RBI can finance on these platforms and not the other fintech companies which restricts participation. According to the government data, only 35.2 per cent of the 4,714 large companies with Rs 500 crore turnover each (as identified by the Ministry of Corporate Affairs in April 2021) were registered on TReDS as of April 2022. However, in a written reply in the Lok Sabha, Bhagwat Karad, minister of state in the finance ministry in March stated that TReDS has financed about 54.56 lakh invoices till February 2023 and the amount involved in invoices discounted was at Rs 1.42 lakh crore.
Experts noted that all stakeholders should acknowledge its positive intent, assess its impact holistically, and consider the evolving market dynamics. There is also a need to put forward concerted steps to foster wider participation and maximise the utilisation of TReDS, unlocking its full potential to empower and uplift the MSME landscape.
