What changed
Insurance companies can now participate in TReDS as a fourth participant, with premium not charged to MSME sellers. All entities allowed under the Factoring Regulation Act, 2011 can now act as financiers, expanding the pool. TReDS platform operators may enable a secondary market for factoring units within the same platform, subject to RBI's transfer of loan exposures directions. Settlement of all factoring units, including those not financed, is now permitted via NACH.
What it means for you
Banks and NBFC-Factors will face increased competition from new financiers, potentially lowering discounting rates. The insurance facility helps financiers hedge default risks for low-rated buyers, encouraging more bidding. Secondary market for factoring units allows liquidity management for financiers. Settlement via NACH for all units reduces reconciliation hassles for MSMEs and buyers.
What you must do
- Review and update your TReDS participation strategy to account for new financier entrants and insurance options.
- Assess the impact of insurance as a non-CRM tool on your risk assessment and bidding behavior.
- Prepare for secondary market transactions by aligning with RBI's Transfer of Loan Exposures Directions, 2021.
- Ensure your systems can handle NACH-based settlement for all factoring units, including unfinanced ones.
Who it affects
Banks participating as financiers in TReDS, NBFC-Factors and other factoring entities, MSME sellers and buyers using TReDS, Insurance companies entering TReDS, TReDS platform operators
Can insurance premium be charged to MSME sellers?
No, the RBI circular explicitly states that insurance premium shall not be levied on the MSME seller.
Will credit insurance be treated as a credit risk mitigant for prudential benefits?
As of now, credit insurance is not to be treated as a Credit Risk Mitigant (CRM) for any prudential benefits.
What happens to factoring units that are not financed?
TReDS platform operators can now settle all factoring units, including those not financed, using the NACH mechanism, instead of requiring buyers to pay outside the system.