This Mumbai company helps SMBs finance invoices, has transacted Rs 3.3k Cr in 3 years

Micro, small, and medium enterprises (MSMEs) and small businesses are the backbone of the Indian economy but they face recurring challenges in receiving payments for the goods or services they supply. In other words, they struggle to convert trade receivables into liquid funds.

The Reserve Bank of India (RBI) decided to set up an institutional mechanism for financing these trade receivables. It released guidelines for setting up and operating a system known as Trade Receivables Discounting System (TReDS).

The TReDS would link MSME sellers, corporate buyers, and financiers (banks and NBFCs) on a common platform. It would facilitate discounting of invoices and bills of exchange. 

The RBI then granted licences to three TReDS platforms: M1xchange, RXIL, and A.TReDS.

One of the first TReDS platforms to start operations was RXIL (Receivables Exchange of India Ltd).

It began operations in January 2017 and has discounted over 81,000 invoices, with the total transacted value crossing Rs 3,331 crore, says RXIL’s MD and CEO Ketan Gaikwad.

“We have 445 corporates (including PSUs), 1,521 MSMEs, and 35 banks and NBFCs on board,” he tells SMBStory. 

Mumbai-headquartered RXIL is a joint venture between Small Industries Development Bank of India (SIDBI), the apex financial institution for promotion and financing of MSMEs in India, and National Stock Exchange of India Limited (NSE), the country’s premier stock exchange.

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In an interaction with SMBStory, Ketan explains how RXIL works and how MSMEs can use it to discount their trade receivables.

Edited excerpts from the interview:

SMBStory: Why did SIDBI and NSE come together to start RXIL?

Ketan Gaikwad: SIDBI and NSE, along with State Bank of India, ICICI Bank, and YES Bank, launched India’s first TReDS platform under RXIL. SIDBI wanted to bring in its expertise, spanning more than two decades, in MSME finance and factoring operations. The TReDS initiative is the continuum of a series of SIDBI’s efforts in addressing the gaps in the MSME ecosystem. 

Back in the early 90s, SIDBI piloted the Receivable Finance Scheme (RFS) in reverse factoring process in India for addressing the delayed payments problem of MSMEs. 

NSE has been on the forefront of innovation and played a catalytic role in reforming the Indian capital markets. As an exchange, NSE was focussing on the growth of SMEs in India by setting up EMERGE for listing of SMEs. NSE wanted to bring in technical expertise in managing exchange operations to start the TReDS platform successfully.

NTREES was an online bill discounting platform and was operated by NSE and SIDBI as a single financier since 2009. NTREES was based on the Reverse Factoring model.

NSE and SIDBI jointly applied to operate the TReDS Exchange, and thus, RXIL was incorporated as a public limited company on February 25, 2016.

SMBS: Tell us about how you came to be the CEO of RXIL.

KG: I have been a career banker with more than two-and-a-half decades of experience in trade finance at Standard Chartered and Barclays Bank. Like the disruption caused by fintechs in the retail/ payment space, I saw TReDS ushering in the same disruption in supplier financing space and ecosystem. 

RXIL was looking out for a CEO, and my skills in operations, transaction banking, setting up teams from ground zero, network among peers, commitment to running a startup with a disruptive approach, while supporting the growth and development agenda, made me take up this job.

SMBS: How does RXIL's trade receivables discounting system work?

KG: RXIL’s TReDS platform currently offers discounting through factoring and reverse factoring. The TReDS platform is regulated by RBI under Payments and Settlement Systems Act, 2007.

RXIL-TReDS facilitates MSMEs to auction their trade receivables at competitive rates through transparent online bidding by multiple financiers. 

The main objective of RXIL-TReDS is to address the critical needs of the MSMEs ie., promptly finance trade receivables based on their buyers’ credit rating.

A factoring transaction begins when the MSME seller uploads a factoring unit on the RXIL platform. A factoring unit (FU) contains all the details of the invoice in a digital format and may contain one or more invoices. The FU needs to be accepted by the buyers and once accepted, it moves to the bidding queue where various financiers place their bids depending on the credit risk of the large corporate/buyer. 

Once the MSME seller accepts the bid, the funds are transferred to their account within 48 hours. A reverse factoring transaction is initiated by the large corporate/buyer when a FU is uploaded on the RXIL platform. The financiers then bid for the FU, post acceptance of the most competitive bid by the large corporate/buyer, the funds are credited to the account of the MSME seller within 48hrs.

SMBS: What is unique about RXIL?

KG: The launch of TReDS Exchange is a milestone in the digital and innovation initiatives of the RBI. The platform is expected to be a catalyst in the growth of MSMEs by significantly improving their liquidity and ushering transparency in the business ecosystem.

TReDS is disruptive financing as this is the first attempt in India for the introduction of factoring without recourse for MSMEs. It is expected to help not only in quick realisation of receivables but also appropriate price discovery through auctioning of MSME receivables. TReDS could be leveraged as a key tool in the new financial architecture in furthering assistance to the MSME sector.

In factoring, the financiers take on the responsibility of collecting the payment from the buyer; the credit relationship is between the financier and the buyer. The MSME vendor gets the money upfront, but gets it at a considerably lower cost, because the cost of financing is based on the risk profile of the large buyer, unlike in the case of bill discounting.

SMBS: What is the process for an MSME to use the system?

KG: The process starts with the large corporate/ buyer first getting registered on the RXIL platform and then referring its MSME sellers in their supply chain ecosystem. Once the MSME is registered on the platform as per the current TReDS guidelines, login details are issued and the MSME can start transacting by uploading the invoices on the RXIL platform.

There is a one-time minimal registration charge and transaction fee, which is a small percentage of the transacted value.

SMBS: What are the challenges in working with MSMEs, corporates, and banks?

KG: While the Government of India mandated all the PSUs and government departments to register on TReDS, it also made it mandatory for companies with a turnover of Rs 500 crore and above to join TReDS. The corporate/PSU registration/participation on the TReDS platform is only for compliance and very minimal. 

As a further boost to ensure the MSMEs get the benefit of TReDS, the government now has made it mandatory for all the public enterprises to not only register but also to register their MSME vendors and to make the payment online.   

MSME awareness about the TReDS platform remains a challenge. There is a plan from the MSME Ministry to increase the visibility of TReDS platform through various government-led promotional activities which stress on awareness of the benefits of the TReDS platform.

MSME industry associations are now sensitised to create awareness about TReDS and promote the platform across MSMEs as well as to ensure registration of MSMEs on the platform. 

Onboarding as per the KYC norms is also a challenge, despite the proceeds going to working capital bankers. TReDS guidelines issued by the RBI stipulates the KYC documentation to be in line with the KYC guidelines issued for account opening/verification done by the banks.

TReDS is required to follow the KYC process as defined by the RBI and this is a time-consuming exercise.

The TReDS platform is essentially a payment platform. Hence, the due diligence process of MSMEs need not be a time-consuming and costly exercise for the platforms. TReDS platforms can rely on the minimal KYC documents from MSMEs to comply with registration formalities like GSTN registration. PAN could be used as a Unique Enterprise Identifier (UEI) for MSME units. This has the potential to dramatically simplify existing KYC norms, allowing MSMEs to easily access TREDS and other platforms.

SMBS: What were the key milestones for RXIL?

KG: RXIL was the first TReDS platform to start its operations in January 2017. We also went live with an invoice fingerprint blockchain solution to prevent double financing of invoices. It’s been a couple of years of our existence, so the real milestones are yet to come. We are looking towards discounting Rs 1,000 crore worth of invoices in a month as the first big milestone. 

The journey has just begun and we haven’t faced insurmountable challenges yet. Every day is a fresh beginning, and we are building great relationships and a robust platform that is going to change the way suppliers financing happens in this country. 

SMBS: How is the company staying ahead of Invoicemart (A.TReDS) and M1xchange? Are they direct competitors?

KG: All three are TReDS platforms and while we are competing, the demand for MSME credit is huge in India. The three platforms can co-exist and cater to it significantly. Each platform has its own strengths. For RXIL, our parentage helps us to be in a good stead by having a strong network of financiers and PSUs on our platform. We will continue to grow our partners while keeping the needs of MSMEs as the foremost objective. 

RXIL has the highest number of factoring (MSME-originated) transactions, which means that the MSMEs are the ones who are engaging with the platform directly. The RBI’s intent of formalisation of MSMEs was one of the major reasons for launching TReDS. At RXIL, we are not only enabling access to formal credit but also making the MSMEs digitally literate. Our team handholds MSMEs until they are completely at ease with initiating the transactions on their own.

Our goal is to reach and cater to more than 25,000 MSMEs by March 2021 and reach a target of monthly transactions worth Rs 1,500 crore by March 2021.

(Edited by Evelyn Ratnakumar)