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TReDS and delayed payments to MSMEs

By CAShorts DeskPublished Source: RBI, PIB (Ministry of MSME, Rajya Sabha Secretariat), Business Standard

Why in news: A CII-ISB study of MSMEs, reported on 13 October 2026, urged wider use of TReDS against delayed customer payments.

TReDS and delayed payments to MSMEs
Illustration (AI-generated)

The Trade Receivables Discounting System (TReDS) is an RBI-authorised platform where banks and NBFCs bid to discount MSMEs' invoices owed by large buyers, paying the seller early and without recourse. Since a 30 June 2026 notification, CPSEs must settle MSME invoices through it. A CII-ISB study has urged wider TReDS use against delayed payments.

Syllabus: GS3 · Indian Economy & Growth; Prelims · Economy & Social Development; GS2 · Government Policies

Why this matters for UPSC

GS3 Indian economy and mobilisation of resources: Prelims can ask who regulates TReDS, who may be a seller, and what without recourse means; Mains, how delayed payments squeeze MSME working capital.

In short

The Trade Receivables Discounting System (TReDS) is an RBI-authorised electronic platform where financiers discount the invoices of MSMEs, turning payments owed by large buyers into early cash.

How an invoice isdiscountedSelleruploadsfactoring unitBuyeraccepts theunitFinanciersbidcompetitivelyBest bidselectedFinancierpays MSMEsellerBuyer repayson due date

TReDS eases the symptom by advancing cash; the cure is enforcing the 45-day rule on large buyers, public and private.

Why it matters

A small firm that supplies parts to a large company or a public sector unit is often paid months late. Meanwhile it must still pay wages and buy raw material, so it borrows at high cost or turns down new orders. TReDS lets that firm sell the accepted invoice to a bank and receive most of the money within days, without pledging property, and without being chased if the buyer later defaults. The larger issue is payment discipline: the MSMED Act already caps payment at 45 days, yet dues stay locked up, which weakens a sector that the CII-ISB study says produces about 31.1 per cent of GDP and 48.58 per cent of exports.

Prelims pointers

  • TReDS platforms need RBI authorisation under the Payment and Settlement Systems Act, 2007; they are payment system operators, not stock exchanges.
  • Factoring: the MSME seller creates the factoring unit; reverse factoring: the buyer creates it. TReDS handles both.
  • TReDS transactions are without recourse to the MSME: a buyer's default is the financier's loss, and default handling lies outside the platform.
  • Section 15, MSMED Act, 2006: pay by the agreed date, at most 45 days from acceptance; with no written agreement, within 15 days.
  • Section 16, MSMED Act: a late buyer owes compound interest with monthly rests at three times the bank rate notified by the RBI.
  • Micro and Small Enterprise Facilitation Councils are set up by State Governments under the MSMED Act and must decide a reference within 90 days.
  • Section 43B(h), Income-tax Act, 1961: a sum owed to a micro or small enterprise beyond the section 15 limit is deductible only when actually paid.
  • MSME classification (2025 notification): micro up to Rs 2.5 crore investment and Rs 10 crore turnover; small up to Rs 25 crore and Rs 100 crore.

Practise a UPSC-style question

With reference to the Trade Receivables Discounting System (TReDS), consider the following statements:

1. Authorisation to set up a TReDS platform is granted by SEBI under the Securities Contracts (Regulation) Act, 1956.

2. Sellers on a TReDS platform must be micro, small or medium enterprises.

3. Government departments and public sector undertakings can participate on TReDS as buyers.

Which of the statements given above is/are correct?

  1. (a) 1 and 2 only
  2. (b) 2 and 3 only
  3. (c) 1 and 3 only
  4. (d) 1, 2 and 3
Show the answer

Answer: (b) 2 and 3 only

1 is incorrect: TReDS platforms are authorised by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007, not by SEBI. 2 is correct: the RBI allows only MSMEs to participate as sellers. 3 is correct: corporates, government departments, PSUs and other entities can be buyers.

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