Moratorium for invoice discounting – Tenure extension

Invoice discounting is an arrangement where an enterprise can sell its unpaid invoices for short-term borrowing. Various platforms help an enterprise in invoice discounting, for example, Trade Receivable Discounting System (TReDS), M1Xchange, Priority Vendor, Invoicemart, or Clear.

During the pandemic era in 2020, companies were facing liquidity problems to repay their ongoing borrowings with financial institutions when the government introduced moratorium benefits to grant relief to these enterprises.

In March 2020, RBI’s governor Shri Shaktikanta Das announced several moratorium benefits on business and personal loans, asset reclassification and provisioning, and working capital support for small businesses. Still, he did not include any relief on borrowing received through invoice discounting.

Many enterprises were using invoice discounting for their working capital support. During the pandemic, these enterprises were on the verge of default since these borrowings do not qualify as cash credits or overdrafts to be covered under moratorium benefits.

On this matter, TReDS and other platforms have suggested that deferment should be allowed as this borrowing should be categorised as working capital advances. TReDS is an online discounting platform regulated by The Reserve Bank of India (RBI), and its objective is to provide instant cash support against future receivables to corporates and MSMEs. These platforms serve as intermediaries between financial institutions (e.g. banks and the Non-Banking Financial Companies (NBFCs)) and borrowers. 

The financial institutions are less worried since these borrowings are backed by unpaid invoices of parties who have a good credit standing in the market, for example, MultiNational Corporations and state and Central government bodies. The borrowings received by MSMEs and small corporations help them fund their working capital with lesser documentation than normal business loans.

Invoice discounting operators like TReDS, M1xchange and RXIL have sought clarity from the Ministry of Finance and MSME. They seek an extension on the borrowings whose repayments are due from March 2020 to May 2020 as global trade is disturbed due to the pandemic causing a liquidity crunch. 

Many renowned businesses across the globe have laid off their employees, shut down production capacities and requested their suppliers to extend credit periods to ensure their business survival.

Luckily, certain institutions have granted moratorium benefits, but other institutions have refused as there are no clear directions from RBI. This may lead to an extreme financial crunch for small corporations and their employees.