RBI permits credit guarantee cover on TReDS to deepen MSME lending

The Reserve Bank of India (RBI) has overhauled the framework governing the Trade Receivables Discounting System (TReDS), introducing a series of measures aimed at improving liquidity and expanding access to credit for micro, small and medium enterprises (MSMEs). A key change allows financiers to obtain credit guarantee cover for exposures undertaken on TReDS platforms, a move expected to encourage greater participation by lenders and strengthen the receivables financing ecosystem.

What has RBI announced?

Under the Reserve Bank of India (Trade Receivables Discounting System) Directions, 2026, which came into effect immediately, financiers will be permitted to obtain guarantee cover for factoring units from government-backed credit guarantee fund trusts. The central bank has also formally recognised such guarantee trusts as participants on TReDS platforms.

The RBI said the changes follow a comprehensive review of the existing framework, with the objective of rationalising and harmonising regulations governing TReDS.

What is TReDS?

TReDS is an electronic platform that enables MSMEs to convert unpaid invoices into working capital by auctioning and discounting trade receivables to multiple financiers. The platform helps small businesses access funds before payments are received from buyers, thereby easing working capital constraints.

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The RBI introduced TReDS to address the persistent cash-flow challenges faced by MSMEs through a transparent, technology-driven marketplace.

Why is the guarantee cover significant?

The availability of guarantee cover is expected to reduce the credit risk faced by financiers, particularly in transactions involving smaller borrowers and buyers with limited credit histories. Lower risks could encourage more banks and financial institutions to participate in receivables financing and expand the flow of credit to MSMEs.

What other changes have been announced?

The revised framework simplifies the onboarding process for MSME sellers and aligns the capital requirements for TReDS operators with those applicable to other non-bank payment system operators.

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The RBI has retained the minimum net-worth requirement for TReDS operators at ₹25 crore and given existing platforms until March 31, 2028, to comply with the revised capital norms.

Can financiers also obtain insurance cover?

Yes. The new directions permit financiers to obtain insurance cover for TReDS exposures. However, the RBI has clarified that the cost of insurance cannot be passed on to MSME sellers. It also said such insurance cannot be treated as a credit risk mitigant for availing prudential regulatory benefits.

What is re-discounting and why does it matter?

In another important move, the RBI has formally permitted further discounting and re-discounting of receivables financed through TReDS. This will allow financiers to transfer discounted factoring units to other eligible financiers in line with existing regulations.

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The move is expected to improve liquidity and facilitate the development of a secondary market for receivables financing.

How has RBI strengthened legal certainty?

The central bank has clarified that once a buyer accepts a factoring unit on the platform, the obligation to make payment on the due date becomes unconditional. Buyers cannot withhold payments or claim set-offs due to disputes related to the quality of goods or services.

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To improve transparency and reduce financing risks, TReDS operators will also have to ensure registration of receivable assignments with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). Platforms must establish mechanisms to verify MSME status and ensure that funds are credited directly to sellers' bank accounts.

What does it mean for MSMEs?

The latest reforms are aimed at making invoice financing more efficient, reducing risks for lenders and improving access to working capital for small businesses. By allowing guarantee cover and creating a more robust framework for receivables financing, the RBI is seeking to deepen the TReDS ecosystem and strengthen credit flow to India's MSME sector.

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