The Goa government’s TReDS adoption is worthy of emulation

News: Central Govt has taken various steps to improve working capital (capital to manage day-to-day expenses) situation of small businesses. RBI too had launched TReDS platform to towards this end. However, many govt procurers lie outside the coverage of TReDS.

It’s in this light that an initiative by the Goa govt assumes significance, wherein it registered itself as a buyer on the TReDS platform and in the process became the first state government to do so.

The subsequent improvement in finances of MSMEs, their owners and workers have given a boost to economic activity in Goa.

Why the Goa state govt took this step?

Pandemic effect on cash flows: The economy and people of Goa depend heavily on tourism. However, due to lockdowns and travel restrictions, tourism got severely impacted, resulting in limited cash flows for small businesses.

Delay in payments: Further, many were engaged in work for government agencies, with significant receivables. But payments were delayed because the state government itself was dealing with its own set of problems.

It led to a dip in tax collections in Goa. This created a vicious cycle where the dip in tax collections caused a further shortage of funds for the govt.

This situation prompted the Goa government to take the initiative of registering on TReDS as a buyer.

How registering on TReDS as a buyer helped Goa govt clear MSME dues?

It partnered with Receivables Exchange of India Ltd (RXIL) to get on-boarded as a ‘Buyer’ on this platform.

On the TReDS system, the government used invoice factoring (online bidding of invoice by multiple financiers-factors), that helped in quick realization of trade receivables at competitive market rates and better tenures. Finally, automated repayments to financiers from government are triggered on due dates.

How did this help the MSMEs?

It addresses two issues facing MSMEs.

One, it enables the prompt encashment of receivables.

Two, factors have no recourse to MSMEs if they don’t get paid on the due date. The credit risk is borne by factors.

Goan MSME sellers received the cash flows they needed on time. Moreover, the government, as the buyer, was able to make payments on favourable terms and avail the support of financiers, including banks, to ensure timely payments to MSMEs in need.

Other benefits:

– Being on TReDS, further enables timely settlement of MSME dues without immediate expenditure from the state’s treasury.

– Finally, automated repayments to financiers are triggered on due dates

What are some steps taken by Centre to improve working capital situation of MSMEs?

– The MSME Development (MSMED) Act of 2006, provides for the naming and shaming of large buyers that don’t pay small businesses on time for goods procured or services received.

– MUDRA loans were designed to widen credit availability.

– The Emergency Credit Line Guarantee Scheme (ECLGS) of the Centre  extends new credit to small businesses.

– The government has made it mandatory for companies with a turnover of ₹500 crore or more to get registered on the TReDS platform. The Government’s e-Marketplace (GeM) is automatically linked to TReDS.

Source: This post is based on the article “The Goa government’s TReDS adoption is worthy of emulation” published in Livemint on 6^th Dec 2021.