In the meantime, Vishwas Corp has to pay employee wages, settle dues with fabric suppliers, cover transportation expenses, and manage other recurring costs. This interim cash flow strain is faced by millions of micro, small, and medium enterprises (MSMEs) across India. Despite accounting for nearly 30% of the country’s GDP, these enterprises routinely grapple with delayed payments that stifle growth and strain liquidity.

The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) was introduced to curb such delays by mandating timely payments and imposing penal interest for defaults. However, the enforcement leaves MSMEs like Vishwas Corp with limited recourse.

In an effort to address this systemic issue, the Reserve Bank of India (RBI) introduced the Trade Receivables Discounting System (TReDS), a regulated digital platform aimed at converting unpaid invoices into immediate working capital for MSMEs like Vishwas Corp., serves as a lifeline for small businesses. Yet, with only about 1,00,000 onboarded, despite a lot more being eligible, its effectiveness depends heavily on wider adoption, regulatory compliance, and robust enforcement. In this article, we will examine how TReDS works, the legal framework, and challenges, probing whether adoption hurdles, shifting payment terms, or weak enforcement keep MSMEs trapped in a cash crunch.

1. Understanding TReDS: A Cash Flow Fix for MSMEs.

Every MSME faces a common issue: they deliver on time but get paid late. The RBI reported that in 2014 the outstanding bank credit to the MSME sector stood at ₹10.39 lakh crore which reflected the sector’s growing dependence on costly, short-term financing to bridge payment delays. To navigate this issue, the RBI proposed a structural solution and launched TReDS through licensed entities such as RXIL, M1xchange and Invoicemart.

TReDS allows MSMEs, classified under the MSMED Act, to sell their approved invoices to banks or NBFCs and receive funds within 48 hours. This mechanism offers a much needed alternative to high interest borrowing, as TReDS transactions are “without recourse”, meaning if the buyer defaults, the financier absorbs the risk and not the MSME.

As of FY24, TReDS platforms collectively financed over ₹1.38 lakh crore through 41.6 lakh invoices, marking an 80% surge in value over the previous year. RXIL alone has processed more than 50 lakh invoices, crossing the ₹1 lakh crore milestone in invoice financing since inception. Despite these gains, this still represents only a sliver of the overall credit and receivables landscape, with India’s MSME credit gap now pegged at approximately ₹25 lakh crore.

While adoption is rising, many large buyers remain outside the system, and a significant portion of MSMEs continue to hesitate, either due to digital barriers or buyer resistance. TReDS has certainly evolved, but its true potential is still waiting to be unlocked.

2. How TReDS Works: From Invoice to Instant Cash.

TReDS operate like an electronic marketplace, where MSMEs are the sellers, invoices are the product, and financiers like banks, NBFCs, insurers are the buyers. The following is a step-by-step breakdown of how TReDS converts a 45-day payment cycle into near-immediate liquidity:

  1. Registration: Both the MSME and its buyer must first register on a TReDS platform, submitting the required KYC documentation.
  2. Invoice Upload: The MSME uploads the invoice.
  3. Buyer Approval: The buyer reviews and confirms the invoice’s validity on the platform. Without this digital approval, the invoice cannot proceed.
  4. Financier Bidding: Registered financiers compete to buy the invoice at a discount.
  5. Fund Disbursement: Once the bid is accepted, the chosen financier transfers the funds typically within 24 to 48 hours directly to the MSME’s bank account.
  6. Final Settlement: On the invoice due date (e.g., Day 45), the buyer pays the full amount to the financier. If the buyer defaults, the financier absorbs the loss and the transaction is conducted “without recourse” to the MSME, as clarified by the RBI.

This system is transparent, competitive, and overseen by the RBI. With discount rates typically between 2% and 4%, TReDS offers a significantly more affordable alternative to traditional credit. However, challenges remain: if buyers delay approval or avoid registration, MSMEs are left with few options. And for smaller businesses with limited digital access, onboarding to the platform can still feel like a tall order.

3. The Legal Framework: Muscle Behind TReDS.

TReDS is not just a digital innovation introduced by the RBI, it’s anchored in a well established legal framework aimed at protecting MSMES and institutionalizing timely payments. As per section 15 of the MSMED Act, buyers are obligated to make payments to the MSMEs within 45 days of accepting goods or services. Failing this, as per section 16 of the MSMED Act, the buyers will be liable to pay compound interest at three times the RBI’s bank rate. To support enforcement, MSMEs can file complaints through the MSME Samadhaan portal, which tracks delayed payments and facilitates dispute resolution.

TReDS adds a layer to this framework by enabling MSMEs to access funds before the due date, provided all parties are onboard and compliant. As per RBI guidelines, platforms must maintain a minimum ₹25 crore capital base and adhere to strict governance norms. Invoices processed through TReDS, referred to as factoring units, are digitized and tradeable, and are accorded the status of negotiable instruments under the Negotiable Instruments Act, 1881, granting them legal enforceability akin to cheques. On the compliance aspect, the Ministry of Corporate Affairs (MCA) has issued clear mandates:

  1. 2018 Notification: All central PSUs and companies with turnover exceeding ₹500 crore must register on TReDS.
  2. 2024 Notification: This threshold was lowered to ₹250 crore, with a mandatory registration deadline of March 31, 2025.

Despite regulatory mandates, enforcement remains a significant challenge. Both the Reserve Bank of India (RBI) and the Registrar of Companies are empowered to initiate penalties against non-compliant entities. Yet, actual participation on TReDS platforms remains significantly below the mandated levels. As per data from the Ministry of Corporate Affairs, nearly 5,000 companies with turnover exceeding ₹500 crore were identified for mandatory onboarding to TReDS. However, by April 2022, only about 1,660 companies had complied with the requirement, which was just over one-third of the total. The situation remained more or less similar even after the eligibility threshold was reduced to ₹250 crore in 2024, with only around 2,500 buyers currently registered on TReDS platform, a figure significantly below the estimated number of eligible entities.

Corporate reluctance is often attributed to concerns over invoice transparency, auto-debit mandates, and exposure of proprietary supply chain data. These apprehensions have led many large entities to adopt a cautious, if not resistant, stance toward platform registration and usage.

Thus, while the legislative and institutional architecture supporting TReDS is both sound and comprehensive, its impact is constrained by uneven adoption and a lack of robust enforcement. The success of the platform ultimately hinges on closing this compliance gap through proactive regulatory monitoring and meaningful deterrents for non-participation.

4. Shorter Payment Cycles and Enforcement Gaps.

Shorter payment terms of 15 to 30 days can ease MSME cash flows but may reduce the attractiveness of TReDS for small invoices, where discounting offers marginal benefit. Yet, with payment timelines varying across clients, TReDS remains a practical tool for bridging liquidity gaps.

Adoption, however, is hindered by buyer resistance as various large corporates remain reluctant to engage on TReDS due to concerns around transparency, auto-debit mandates, and exposure of supply chain data. This reluctance limits MSME access and transaction volume.

On top of the above stated, the enforcement also remains weak. While registration is mandated for companies with turnover above ₹250 crore by March 31, 2025, compliance is often superficial as some buyers register on the platform but process few invoices, avoiding the platform’s intent. For TReDS to achieve systemic impact, enforcement must evolve from passive monitoring to active deterrence, backed by real-time audits and meaningful penalties.

5. Conclusion: A Work in Progress.

TReDS offers a vital solution to the persistent issue of delayed payments for MSMEs. Backed by the MSMED Act and RBI oversight, it provides fast, debt-free access to working capital by allowing MSMEs to convert invoices into cash within days. Despite its promise, uptake remains low, covering just 2% of receivables due to limited buyer participation, digital barriers, and weak enforcement.

To fully enjoy the potential of TReDS, targeted reforms are necessary, such as mandating its integration into public procurement contracts, enhancing digital literacy among MSMEs, and ensuring robust enforcement through penalties for non-compliance. Until such measures are implemented, TReDS will remain as a valuable support mechanism, but not the transformative solution that India’s MSMEs require.