Bridging the MSME Credit Gap: TReDS as a Strategic Liquidity Solution

The article examines the persistent credit challenges faced by MSMEs in India and highlights the Trade Receivables Discounting System (TReDS) as a practical solution to address liquidity gaps. Despite contributing significantly to GDP and employment, MSMEs continue to rely on informal credit due to limited access to formal financing. TReDS, a digital platform regulated by the RBI, enables MSMEs to receive early payments against invoices without collateral, offering a more structured and transparent alternative. The article also outlines the role of ICAI and Chartered Accountants in promoting TReDS adoption through advisory, compliance, and integration support. It stresses the need for broader awareness, policy push, and ecosystem participation to mainstream TReDS in the MSME financing landscape.

India’s Micro, Small, and Medium Enterprises (MSMEs) are the driving force behind the nation’s economic engine. They’re the neighbourhood manufacturers, the small-town service providers, the family-run units that quietly power everything from local jobs to global exports. The United Nations estimates that MSMEs contribute nearly 50% to the global economy and are responsible for generating 60–70% of employment worldwide. As of FY25, MSMEs contribute over 30.1% to India’s GDP, drive more than 45.73% of exports, provide employment to over 28 crore people, and over 51% of them are based in rural India. Whether it’s keeping supply chains moving or creating livelihoods in the country’s remotest corners, these businesses are doing the heavy lifting. And yet, despite playing such a critical role, they often operate under the radar without the kind of support or resources they truly need. Strengthening them is the only way to ensure that our growth story reaches every street, every town, and every aspiring entrepreneur. 40% of the formal MSMEs globally, especially from the developing economies, face a combined credit shortfall of $5.7 trillion annually.

MSME Credit Scenario: Gaps and Structural Constraints

In India too, the MSME sector is vast and incredibly diverse. While there has been progress in improving formal credit access, which accounted for ₹40 trillion by FY25, this barely touches the surface of the credit demand. A startling ₹30 lakh crore credit gap is hidden beneath the surface and access has reached only 19% of the registered MSMEs in the country. A sizable portion of these small businesses still have difficulty obtaining official financing and must instead rely on trade credit, local moneylenders, or personal savings. These unofficial sources frequently have strict repayment terms and high interest rates, which hinder the ability of these companies to grow, remain competitive, or even weather lean business cycles.

Disruptions to cash flow are yet another significant obstacle. Large corporations and government agencies frequently have delayed payments, which causes MSMEs to wait months to receive payment for finished work. Although the MSME Development Act expressly states that payments must be made within 45 days, enforcement of this law is often lax. For fear of losing future business, the majority of small businesses are reluctant to demand on-time payments. However, banks and NBFCs frequently require high creditworthiness, thorough documentation, and collateral security. Missed opportunities and operational stress result from loans that, even when approved, arrive too late to fill urgent gaps. To better support MSMEs and the growth of the economy, there is a need for alternative financing options which will allow MSMEs the access to capital that will fuel continued progress.

Digital innovation is beginning to make a significant impact here. A new and technology-driven model that closes the timing and trust gap between small firms and financiers is provided by platforms such as the ‘Trade Receivables Discounting System’ (TReDS). MSMEs can digitally discount their invoices and obtain funds in a matter of hours, eliminating the need to chase payments or deal with paperwork-heavy loans and higher interests. It is quicker, requires no collateral, and promotes an open market where different Banks/Financiers can compete for lower interest rates. TReDS, which is inclusive, tech-driven, and designed for India’s changing business environment, is essentially the future of MSME financing. A key feature of TReDS financing is that it operates on a non-recourse basis — meaning, in case the buyer defaults on payment, the MSME supplier is not held liable to repay the financer.

Role of ICAI in Strengthening MSME Financial Ecosystems

The Institute of Chartered Accountants of India (ICAI) plays a catalytic role in supporting India’s financial infrastructure, especially for MSMEs. Recognising the credit challenges faced by small businesses, ICAI has actively promoted financial literacy, digital adoption, and transparent working capital management. It has also been instrumental in educating Chartered Accountants on alternative financing models like TReDS through training modules, audit checklists, accounting treatment, and technical guidance. By equipping its members with the tools to serve as strategic advisors and compliance enablers, ICAI is driving meaningful financial inclusion and empowering the MSME sector.

Alternative Financing Options for MSMEs

To manage their working capital needs, MSMEs usually look at a variety of financing options, each with a unique set of trade-offs. The most conventional options are still bank overdrafts and working capital loans, but many small businesses cannot afford them due to their lengthy processing times, CIBIL errors, ratings and score, high documentation requirements, and collateral requirements. Despite their benefits, factoring and invoice discounting are small-scale operations that rely significantly on the quality of bilateral ties with financial institutions. Though it is typically created for larger vendors, supply chain finance is another successful model that doesn’t always trickle down to smaller players.

Fintech-based cash flow lending has become a popular choice for modern businesses because it is quick and entirely digital. However, not all small firms may be able to afford the high interest rates and risk-based pricing associated with these loans. TReDS offers a substantial improvement in this regard. As an RBI-regulated program, TReDS ensures a transparent mechanism where MSME suppliers can upload their invoices and receive real-time bids from multiple financiers, empowering them to choose the most competitive offer available. What sets TReDS apart is its neutrality and platform-based design. It facilitates early payments to MSMEs without altering the buyer’s cash flow cycle or impacting their balance sheet, making it strategically advantageous for CFOs. An added advantage for buyers using the TReDS platform is that it helps them stay compliant with MSME payment timelines, thereby avoiding disallowance of expenses under Section 43B(h) of the Income-tax Act and the associated cost of non-compliance. Beyond just improving liquidity, it also improves supply chain durability, supports inclusion, improves ESG performance, and complies with legal requirements. Without having to re-negotiate terms or provide upfront advances, CFOs can guarantee vendor satisfaction and financial efficiency.

TReDS Explained: Legal and Operational Framework

The RBI oversees the first-of-its-kind digital initiative, the Trade Receivables Discounting System (TReDS). It is intended to address a major issue for MSMEs: buyers’ late payments. A network of registered financiers, including banks, NBFCs, and insurers, can bid to buy the approved invoices that small businesses upload to a secure TReDS platform. As a result, MSMEs can obtain funds in as little as 24 hours without having to provide collateral or endure onerous loan procedures.

The process is easy to use and effective. An invoice uploaded by an MSME is digitally verified by the buyer, usually a large corporate or public sector organization. After approval, financiers compete for the best price on the invoice discount. The MSME receives the discounted payment almost instantly and the buyer pays the financier on the due date of the invoice. All parties benefit from increased trust and operational clarity enabled through digital, transparent steps.

TReDS provides strategic benefits in addition to liquidity. Better cash flow and cheaper borrowing costs are what it means for MSMEs. Because the financing is handled off the buyer’s balance sheet, it guarantees that vendor payments are made without putting a strain on internal cash cycles, which is important for CFOs of large organizations. Additionally, it supports ESG objectives by encouraging small business financial inclusion and assists companies in meeting regulatory standards. Full audit trails and smooth ERP integration make TReDS an essential tool for improved supply chain finance and governance.

Key Regulatory Developments CAs Should Track

The TReDS ecosystem has experienced substantial operational and regulatory improvements over time, making it a more reliable and inclusive financing option for MSMEs. The RBI’s decision to permit insurers and non-banking financial companies (NBFCs) to act as financiers on the platform was a significant advancement. As a result, the pool of capital providers has significantly expanded, giving small firms better access to funding and more competitive bidding. In a move to enhance buyer-side participation, the RBI in FY 2024–25 reduced the mandatory TReDS registration threshold for companies from ₹500 crore to ₹250 crore in annual turnover. Now, all companies with turnover exceeding ₹250 crore are required to register on the TReDS platform. By ensuring that invoices are approved and paid on time, this regulatory push guarantees that big corporate buyers are using the platform, which directly improves MSME cash flows.

Along with the mandatory registration, it also made it compulsory for all the entities that purchase from MSMEs to clear their invoices within 45 days once the invoice is raised, and non-compliance can result in disallowance of the expense for income tax purposes, meaning the amount cannot be deducted from taxable income until it is actually paid. The rule is designed to improve the cash flow of MSMEs and prevent them from facing financial strain due to delayed payments. Due to lack of awareness, many entities cancelled their orders with MSMEs and many MSMEs also deregistered themselves to accommodate their buyers’ terms to have a continued business engagement. However, the entities which were already using the TReDS platform benefitted with the invoice financing, which did not put pressure on their cash flows but were also able to meet the regulatory requirement of the payments being made within the said time frame of 45 days.

The integration of TReDS with government platforms like GeM SAHAY and e-invoicing portals has further streamlined the invoice validation process. This tight coupling ensures data accuracy, prevents duplication, and enhances fraud prevention. Importantly for financial reporting, TReDS transactions qualify for off-balance-sheet treatment under Indian Accounting Standards (Ind AS), preserving key debt metrics for buyers.

From a compliance perspective, the platform’s digital architecture ensures that every transaction is time-stamped and traceable, making GST reconciliations and tax audits more seamless. For Chartered Accountants and CFOs, these advancements make TReDS a more attractive and viable option to embed within the financial operations of businesses, enhancing liquidity, strengthening compliance, and supporting better vendor relations.

Role of Chartered Accountants: Advisor, Auditor, Enabler

For Practicing CAs and CA Firms, TReDS presents a valuable opportunity to offer strategic liquidity advisory to MSME clients. Chartered Accountants can help businesses map out their working capital requirements and demonstrate how TReDS can effectively bridge cash flow shortfalls. From facilitating initial onboarding to assisting with documentation and invoice upload procedures, they can simplify what may otherwise be a technical and regulatory-heavy process for clients. More importantly, they can help integrate TReDS inflows into management information systems (MIS) and financial forecasting tools, enabling small companies to make more informed decisions based on predictable cash flows.

Internal and Statutory Auditors play a critical role in ensuring that TReDS adoption aligns with compliance and audit norms. With TReDS transactions falling under the purview of Ind AS, auditors can assess whether financial disclosures reflect these off-balance-sheet instruments appropriately. They can also monitor buyer-side adherence to MSMED Act norms, especially the mandatory 45-day payment window for MSMEs. The digital nature of TReDS, complete with time-stamped transaction logs, makes it a powerful tool for ensuring audit transparency and resolving payment disputes based on verifiable data.

For CFOs and Management Accountants, the integration of TReDS into enterprise resource planning (ERP) systems is a game-changer. Automation of invoice uploads, approvals, and payment tracking can reduce manual errors and speed up turnaround times. More critically, the data generated through TReDS can be used for real-time forecasting and more agile liquidity planning. CFOs can also drive policy alignment across procurement, accounts payable, and finance departments to ensure internal SOPs reflect the use of digital trade financing tools like TReDS, resulting in stronger internal governance.

Impact Created: Case Studies and Metrics

TReDS platforms till date have discounted invoices worth over ₹600,000 crores since inception, of which the discounting worth over ₹235,000 crores was facilitated in FY 24-25 itself. The TReDS ecosystem is becoming increasingly recognized as a dependable, scalable financing option for MSMEs. This expansion indicates a move toward more open and effective working capital procedures, particularly for businesses that have historically had trouble with late payments and restricted access to official credit.

Limitations & Practical Bottlenecks

Despite its promise, TReDS adoption is not without challenges:

• Slower adoption of PSUs: Longer invoice approval processes within the PSUs limits the adoption of TReDS by its suppliers/vendors.
• Buyer Resistance: Many large corporates hesitate to onboard, fearing visibility into payment cycles or administrative overhead.
• Non-MSME suppliers: Non-MSME suppliers are currently not allowed on the TReDS platform, which limits the application.
• Awareness Gaps: Tier-2 and Tier-3 MSMEs are often unaware of TReDS or lack the digital literacy to use it effectively.
• Integration Issues: Smaller enterprises struggle to sync TReDS with internal ERP or billing systems.
• Policy Weaknesses: While registration is mandatory for larger buyers, enforcement and incentives remain weak.
• Government Departments not in the Corporate Buyer Category: Government Departments are currently not classified as ‘corporate buyers’ under the system. As a result, MSMEs supplying goods or services to government entities are unable to upload such invoices for discounting on the TReDS portal.

What’s needed is a broader push, both policy-driven and awareness-focused, to make TReDS the default mechanism for trade finance.

The Road Ahead: Empowering CAs to Mainstream TReDS

Chartered Accountants play a crucial role in TReDS and are in a unique position to facilitate financial transformation. Through focused initiatives, the Institute of Chartered Accountants of India (ICAI) has already started to harness this potential. These include the creation of operational templates and audit checklists to direct adoption, partnerships with TReDS platforms to enable more seamless client onboarding, and structured training programs aimed at enhancing technical fluency. The groundwork for widespread TReDS adoption and literacy is being laid by such initiatives.

For CFOs and Controllers, the way forward is equally clear. TReDS should be embedded within standard audit protocols and vendor financing strategies. Finance teams should be encouraged to participate in ICAI-led workshops to stay ahead of regulatory changes and digital adoption trends. Most importantly, organizations can drive real impact by mandating TReDS participation among their key MSME suppliers, ensuring business continuity, supplier satisfaction, and improved working capital management.

Conclusion

TReDS represents more than just a digital solution to delayed payments; it is a structural shift in the way MSMEs access working capital in India. By offering transparent, collateral-free, and real-time financing, it bridges critical liquidity gaps while improving compliance, governance, and supply chain resilience. For CFOs, it is a strategic lever that supports ESG goals and preserves cash cycles. For Chartered Accountants, it opens new opportunities to act not just as auditors, but as enablers of financial innovation for their clients. With continued regulatory support and increased awareness, TReDS can evolve into a default national platform for MSME financing. As ICAI continues to lead from the front, its members have a defining role in mainstreaming this transformation, ensuring that no viable enterprise is left behind due to lack of timely capital.