Trade Receivables Discounting System

Trade Receivables Discounting System

MSMEs : Growth Engine for the Indian Economy MSMEs: Pillar of the Economy growing at CAGR of 11.5% Indian MSMEs share constitutes 37.5% of the total GDP 70 Mn employment generation 45% of manufacturing output MSME sector wise % of GDP, 2012-13 30.50% 37.54% 40% of overall exports Source: MSME at a Glance Report 2016; KPMG Report MSMED Act 2006 and PSL status have been significant policy interventions MSMEs in India have received fillip through Government initiatives like Make in India, Skill India and Digital India Credit Rating Agencies, factoring companies & platforms like TReDS are intended to improve credit flow in MSMEs 7.04% Manufacturing Services % of GDP Source: MSME Annual Report 2015-16 Enabling environment being created for MSME growth Legal & Regulatory Framework Growth of MSMEs Government Support Finance Infrastructure

MSMEs : Growth Engine for the Indian Economy Strategic Importance of MSMEs Government Initiatives Plays a pivotal role in the economy. Provides employment opportunities outside agriculture sector, primarily Services sector Make in India initiative - increase the share of manufacturing in the GDP Carters to local & foreign markets Skill India Initiative Important partner in the value chain of Large enterprises & MNCs / Global companies Public procurement policy - Procure a minimum of 20 per cent (by value) from MSEs Acts as a Raw material supplier / Contract manufacturer/scm Partner / service provider MSMEs Indian Economy Micro and small enterprises (MSE) cluster development programme (MSE-CDP) Evolves into strategic partner providing innovative / niche manufacturing / advanced & low-cost technology & superior services. MSMEs capitalise on the trade opportunities owing to India s close proximity to key automotive markets like the ASEAN, Japan, Korea and Europe etc Prime Minister s Employment Generation Programme (PMEGP) PMKVY (Pradhan Mantri Kaushal Vikas Yojana) National Manufacturing Competitiveness Programme

Challenges faced by MSMEs Dearth of easy financing continues to plague MSMEs Low formal sector coverage leads to high debt cost Dearth of Easy Finance & Credit Instruments 79% Sources of Finance (%) 78% Limiting Regulatory Policies 78% Unavailability of Modern Technology 76% 22% Lack of Infrastructure Facilities 74% Formal Source: IFC Report 2013 Informal Absense of Marketing platforms and Distribution 72% High cost of funds owing to higher default risk Labour Laws & availability of affordable skilled labour 70% Source: FirstBiz-Greyhound Knowledge Group SME Survey, 2014 (n=540) % of respondents Lack of adequate collateral No credit history due to a weak financial profile The Trade Receivables Discounting platform aims to bridge the financing gap between MSMEs and formal credit institutions Complex documentation processes of banks Inefficient working capital management

Need for TREDS 10% coverage by formal institutions Only about 10% of the factoring market in India covered under formal bill discounting system in 2014. In the current scenario, lack of adequate finance, especially working capital finance has become the biggest challenge for MSMEs, affecting their liquidity and business High risk perception and limited access of MSMEs to adequate collateral are major reasons why formal financial institutions have limited their exposure to this sector High stamp duty and limited regulatory framework have also been acting as impediments against the growth of MSMEs To address the above challenges, the Reserve Bank of India envisaged the idea of an e- discounting system on the lines of the successfully executed Mexican NAFIN Cardenas model

Genesis of A.TREDS LTD Citing the need for and use of Trade Receivables Discounting System (TREDS) for improving flow of funds to MSME sector, the RBI granted approval to Axis Bank under the Payment and Settlement System (PSS) Act 2007 for setting up a (TREDS) platform. The platform is known as Invoice mart. The Third Largest Private sector bank in India A 50:50 joint venture of two Indian steel conglomerate the Steel Authority of India Ltd (SAIL) and Tata Steel operating the world s largest e- Marketplace for steel and steel products ** A.Treds Limited (subsidiary of Axis Bank) was incorporated in 2016 and is headquartered in Mumbai, India

The Market Participants A.TREDS will be operating the online receivables discounting platform for facilitating the short term financial transactions in a smooth and efficient manner among the following market participants: Financiers (Banks/ NBFC Factors) MSME Sellers F1 F2 SME 1 SME 2 F3 SME 3 C1 C2 Buyers (Large Corporates)

How it Works? Seller sends goods to buyer 1 Buyer receives goods and does quality and quantity check 3 Buyer verifies invoice, accepts for payment and provides due date 5 Financiers able to view all invoices accepted by various buyers on the platform 7 2 4 6 Seller raises invoice on platform Buyer logs on platform and is able to view invoice Invoice moves to queue of financiers

How it Works? (Contd ) Bidding window closes for financiers Seller accepts quote with lowest rate of interest Funds are transferred from financier s a/c to seller s a/c 9 11 13 8 10 12 14 Financiers quote their rate of interest Quotes are visible to seller for his acceptance Financier winning the bid is intimated On Due date funds are debited from buyer s a/c and credited to financier s a/c

Why Migrate to TReDS? What s in it for the Corporate Buyers? What s in it for Banks and FIs? What s in it for the MSME Sellers? Better terms of contract in terms of flexible usance period upto 180 days Tool for lowering procurement costs Efficient working capital management & future cash flow management Access to MIS and analytics based on data of past transactions Reduced acquisition and servicing cost to MSMEs Better risk management due to shift of risk to large blue chip buyer Priority Sector Lending benefits & exposure Improved working capital management due to quicker turnaround of receivables Better price discovery Reduced cost of funds & mitigation of uncertainty of payment Non collateralized and nonrecourse financing TReDS Platform

Strategic Advantage : A.TREDS Ltd Business Know How Promoter one of the market leaders in banking with strong understanding of business Extensive dealing with financiers through Syndication & corresponding banking arrangement Access to Large Corporates Significant history of dealing with large corporates across array of services such as credit, Transaction Bkg. Perfectly positioned to tap existing customer base Expertise in Dealing with MSMEs Promoter has strong MSME franchise for over a decade Dedicated facilities to cater to MSME business Right synergy : Deep understanding of Trade Finance & E Commerce (Auction) Business Technology Know How In-depth knowledge and experience in B2B platforms Promoter runs India s largest B2B ecommerce platform and world s largest emarketplace for steel

E-Marketplace Lending: Digital Financing solutions for MSMEs Investment in Indian fintechs have grown 7x in 2015 YoY Growth of online consumer lending in India Investments (USD Bn) 1.2 Top Funded Sector: SME lending 0.145 Capital Float Funding: 16 Million USD LendingKart Funding: 9.5 Million USD NeoGrowth Funding: 4.6 Million USD 2014 2015 Source: Fintech: Redefining banking for customers, CII 2016 ~27 Million USD ~30 Investment in alternate lending companies from January 2014 to July 2015. companies in the P2P and SME lending space, with more than half founded between January 2014 to July 2015. Source: Marketplace Lending, Deloitte; NBFCs: The Changing Landscape, Assocham 2015 The new trends in SME financing are getting influenced by digital revolution includes analytics based lending, peer to peer lending and many other variants New age NBFCs like Capital Float, LendingKart, NeoGrowth and Credex through their proprietary credit models and digital platforms have been able to finance businesses that have not generally been targeted by traditional banks The market places offer a fundamentally lower-cost operating model, data advantage in scoring risk and a superior customer (borrower) experience, driven by speed and convenience Few companies also operate Discounting platforms and facilitate pre and post shipment finance

Lending Business Models: Changing Channels Marketplace Lending (MPLs) TReDS as a unique Marketplace Model Loan (Fees/Commissions) Lendor(s) Borrower(s) loan repayments Marketplace lenders (MPLs) directly match lenders with borrowers via online platforms. They make money from fees and commissions from borrowers and lenders MPLs use traditional, bank-like, credit-scoring approaches, and publicise these credit risk scores MPLs offer transparency and control to lenders, such as through disclosure on recipients of funds lent out Source: Marketplace Lending, Deloitte TReDS provides a platform which enables Price Discovery of interest rates charged to MSMEs/Buyer through a transparent bidding process, thus ensuring cheapest working capital financing for MSMEs MSMEs are provided non-recourse, non- collateralised financing and Financiers get Priority Lending Benefits Acts as a tool for buyers to onboard & adopt more MSME suppliers into their vendor list. Better financial health of MSMEs ensures quality & timely delivery of material & Services to buyers.

The Way Forward MSMEs are well poised to capitalise on the global trade opportunities TReDS is an appropriate platform to provide the MSMEs the financial solutions Will enable MSMEs to migrate to large players, compete in a equitable manner domestically & spread their wings globally Use of electronic & digital methods of payment has risen exponentially in India. Unique formal credit systems and Fintech nature of TReDS has appropriate acceptability TReDS provides opportunities for all and shall facilitate GTR s intent international corporates looking to enter the Indian market & Financial institutions providing funding options Futuristic aspect like mobile app shall ease the process & would lead to Financing on the go Credit risk insurance, secondary market opportunities, scope expansion to bring in the Non-PSL portfolio & export bills into TReDS financing solution purview would define the way forward Moving away from paper based & traditional trade to technologically superior, transparent, secure and agile platform like TReDS will help cost optimisation, better efficiency and heightened growth

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