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What To Know About The Invoice Discounting Facility In India

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The daily operations of small and medium-sized enterprises are indeed complex. There is no doubt about this aspect. Several factors influence their activities as per the report of the International Finance Corporation. This global financial monitoring body's statistics highlight that the MSME sector has a funding deficit of Rs. 2.93 Trillion. About 97% of SMEs in India suffer from inadequate working capital. The primary reason for this adverse scenario is the long duration of credit cycles.

Nowadays, with several financing options available in the market, the SME owners can heave a sigh of relief. An invoice discounting facility is a popular financing option for obvious reasons.

What is the bill discounting?

It is a trade operation where the seller gets the amount before the due date from the lender. More importantly, the seller receives the amount at discounted rates. It is also helping buyers at large. With their contributions like interest rates, the banks and financial institutions get a chance to increase their revenues by a significant margin. Invoice discounting is also referred to as bill discounting.

What are 'bills of exchange'?

Most of us are ignorant about this term. Simplistically, bills that fall under account discounting are known as 'bills of exchange.' You can make the most of the discounting feature of these bills to avail of loans. In this case, the loan limit is extended to 90% of the raised statements. The buyer's creditworthiness has a significant role to play in determining credit tenure.

Benefits of bill discounting

Some of the significant benefits of bill discounting are listed below:

  1. Credit assessment: The banks and financial institutions get a scope to check the seller's reputation while probing into his/her creditworthiness, transaction history, and financial stability.

  2. Instant cash: If you are a business owner, you can get instant cash from bill discounting. It is a boon for startup owners in more ways than one. It enables them to give an added dimension to their businesses.

  3. Bill usage: It is commonly termed as 'Usance Period.' It is a time frame in which the invoice has to be authentic as permitted by customers. The bill usage period doesn't exceed three months.

Additional advantages

  • Hassle-free withdrawals

  • Flexibility in the repayment period

  • Increased cash flow

  • Quick authentication

  • Superfast processing and smooth documentation

Reasons for adopting the bill discounting model in India

In recent times, there has been an increasing adoption of invoice discounting models in India. The major factors behind it are discussed below:

  1. Corporate buyers have the bargaining capacity: In India, the corporate buyers have the maximum bargaining capacity in expressing reservations. They also accept the tasks of receivables that are focused solely on the financiers' interests.

  2. Determining MSMEs' credit rating is difficult: No doubt, it is a strenuous job for the financiers. Choosing small and medium enterprises' credit rating is next to impossible due to a lack of adequate information. Also, the pledged collaterals are unavailable, which further enhances a financier's credit exposure.

  3. Only a few financial institutions give discounts other than banks: In India, banks dominate the discounting landscape. Henceforth, the bill discounting financing model is the viable option for most SMEs.

  4. Very few MSMEs are aware of the discounting services: MSMEs situated in rural areas don't have proper knowledge of discounting services. They also don't have information relating to export manufacturing.

Role of RBI in implementing bill discounting model

It was in 2014 when the RBI realized the need for having an institutional setup that will accelerate bill discounting in India. An electronic exchange for bill discounting got developed for this purpose. This fintech solution addressed the shortcomings in the scenario of bill discounting in India. In the past few years, there are some notable developments around bill discounting, keeping in mind the new technologies and their implementation implications.

TReDS, the digital bill discounting platform, was built to combat the issues of information asymmetry. Financiers also can't claim high rates from the buyers. It reduced the time for payments and thereby, giving relief to the sellers.

Features of TReDS

This virtual institutional mechanism for enabling the financing of trade receivables is convenient of all sorts. The significant characteristics of this digital platform are listed below:

  1. Financiers, sellers, and buyers can come on the same platform for a one-time agreement. It minimizes documentation costs at large. Here, the sellers don't have to execute a separate agreement during discounting transactions.

  2. After the agreement gets executed, the seller offers goods/services to buyers, and with their acceptance, the bill gets generated on the digital platform.

  3. When the seller accepts the bid, the amount is credited to his/her account based on the cut-off time. According to the National Automated Clearing House (NACH) instructions, the understanding of the financier is auto-debited after that.

What makes MSME suppliers opt for the TReDS platform?

TReDS platform is the preferred choice for MSME suppliers due to the below-mentioned aspects:

  1. The credit rating of the corporate buyers is the sole determinant for financing on the TReDS platform.

  2. TReDS is based on without recourse to the seller model. It signifies the financier can get back the bill amount from the buyers.

With the emergence of the TReDS platform, the bill discounting process has become simpler. It is beneficial for all the three parties, i.e., buyers, sellers, and financiers involved in the process.

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Sanjana Mehta I am Sanjana Mehta, an Insurance Advisor.
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