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Invoice discounting limit/industry update

Updated on :  

08 min read.

RBI’s Governor Shaktikanta Das announced an increase in the NACH mandate limit for Trade Receivables Discounting System settlement (TReDS) from Rs.1 crore to Rs.3 crore. 

TReDS is an invoice discounting platform for MSMEs which provides short-term financing based on unpaid corporate debtors. TReDs uses the NACH system to settle its transactions.

What is NACH, and why was it increased?

NACH (National Automated Clearing House) is a fund clearing platform that aims at facilitating high volume transactions that are repetitive.

Requests were received from various stakeholders to increase ease of financing and meet liquidity requirements for MSMEs. This increase in limit from Rs.1 crore to Rs.3 crore will ease the financing requirements. 

Earlier, MSMEs would split the invoice’s value and submit many invoices since the value of each invoice was fixed at Rs.1 crore. Due to the increase in the NACH limit, MSMEs can submit a lower number of invoices.

Why has this been done?

India has around 63 million MSMEs that contribute 29% of its annual GDP and give employment to more than 110 million people. The revised NACH limit has helped to increase funds flow to the MSMEs. 

TReDS: What it is, and how does it help MSMEs?

MSMEs play an important role in the economic development of the country. MSMEs regularly face problems in arranging finance, particularly in converting their receivables into cash. 

To address these issues, RBI had set up TReDS to facilitate the financing of MSMEs’ trade receivables. The invoices should be raised on government departments, public sector units and corporates with good credit standing.

On the TReDS platform, the MSMEs have to upload the invoices, which their customers must accept. TReDS would then release funds at a discount that helps MSMEs fund their working capital or ongoing projects.

What other initiatives are the government and RBI taking to help MSMEs?

Apart from TReDs, the government has launched various schemes to support MSMEs in the nation-building process. These include:

  • Udyog Aadhaar Memorandum (also known as Aadhaar for business) eases the process for companies to avail of loans or subsidies from the government.
  • Zero defect policy: Under this policy, the MSME has to comply with certain standards for exported manufactured goods such that those goods are not rejected and sent back to India. In compliance with these standards, MSME will be eligible for certain concessions.
  • Capital linked subsidy scheme: Under this scheme, a capital subsidy is provided to businesses to upgrade their new technology to replace their old technology.

Impact: Prospects for growth

MSMEs manufacture more than 8,000 products. They contribute around 40% of exports and 45% of manufacturing output. In the last few decades, MSMEs have shown immense potential in various industries such as food processing, chemicals, software and support services.