Trade Receivable Platforms Start To See Defaults As Firms Defer Vendor Dues

Electronic trade receivable platforms, which had gathered steam over the last few years, have started to see sporadic instances of default, according to executives at three different platforms who spoke on condition of anonymity. The defaults are a consequence of a sudden stop in cash flows for a number of companies across sectors, which, in turn, have delayed payments to vendors.

There are currently three electronic trade receivable discounting, or TReDS, platforms in India. These include Receivables Exchange of India Limited, Invoicemart by A.TReDS and M1xchange. Using these platforms, small businesses can submit bills for goods sold to larger corporations. Lenders pay small businesses a certain amount upfront, after some discounting, based on the assumption that the larger corporate will make good on the payment within a certain period of time. At the end of an agreed period, which can be anywhere between 30-180 days, the large corporate pays the lender directly.

What has begun to happen as a consequence of the sudden stop in business and cash flows is that a handful of corporations have defaulted across each of the TReDS platforms, confirmed the executives quoted above. The number of defaults is so far in single digits for each of these platforms, they said. They declined to specify the names of individual corporations which have defaulted.

“All industries across the board have been disrupted and the challenges range depending on the ground realities across individual states. However, not all corporates are in immediate stress. We have initially seen around 20 to 30 percent of corporates on our platform requesting banks for extensions/moratorium,” said Prakash Sankaran, chief executive officer at A.TReDS Ltd, one of the three platforms.

Sankaran said that overall the three platforms would have discounted invoices of approximately Rs 11,100 crore in the last fiscal year. The volumes could be impacted in the coming year in the absence of targeted measures to address the situation.

While most sectors are impacted by the lockdown, exports, retail trade, textiles, capital goods, steel, vehicle manufacturers and manufacturing-related companies and MSMEs face the toughest situation at present.

Due to the shutdown, anchor corporates are re-negotiating payment terms, deferring orders or delaying payments to vendors, said Nirav Choksi, co-founder and chief executive officer at CredAble, a working capital and trade finance provider. “Working capital cycles are definitely likely to increase significantly and large companies are conserving cash by deferring non-critical payments rather than pay-rolls as much as possible. It will take 8-12 weeks to assess the real impact,” he said.

Moratorium Rules For Working Capital

Part of the problem is also the lack of clarity on moratorium rules that apply to working capital facilities.

The first executive quoted above said the Reserve Bank of India’s moratorium only speaks about cash credit and overdraft facilities. The FAQs issued by the Indian Banks Association do not specify whether the moratorium applies to bill discounting. Due to this lack of clarity, banks have not uniformly implemented the moratorium, this person said. There are bound to be delays in payments on due dates or defaults in the coming weeks, this person said.

According to the second executive, while private sector banks have extended the moratorium to some of these large corporates, some of the larger public sector banks have held back. As such, not all corporations have managed to conserve cash by delaying loan payments and, hence, may default on vendor dues. Fresh loan sanctions are not possible as banks are taking longer to assess demands, this person said.

In two letters dated March 25 and April 1 this year, the three TReDS platforms asked RBI for clarity on the moratorium as corporates have requested for an extension on the due dates of existing and upcoming invoices to avoid defaults.

The platforms have recommended that the RBI provide an extension of the due dates for existing transactions, due up to June 30, 2020, by an additional 90 days or more.

They have also asked the regulator to increase the maximum tenor on TReDS platforms from 180 to 360 days. In addition, the platforms are seeking a first-loss guarantee up to 10 percent for TReDS platforms for the next six months. This will enable some financing activity to continue via the platforms.

According to Sankaran, though some delays and defaults in payments have begun, large scale defaults are unlikely. He, however, cautioned that the situation can worsen if there is no intervention.

“While there is a concern around bank and NBFC financing, the other issue is that many large corporates are not approving invoices that their suppliers are uploading,” he said, adding that this could mean a further delay in payments to already cash strapped small businesses.

Risk For Banks, NBFCs

A senior banker, who also spoke on condition of anonymity, said that some large companies are defaulting on their obligations. For financiers, this means that even if a small payment goes into default, the lender needs to mark down all dues of that corporation and make additional provisions.

This banker too felt that part of the problem is that TReDS platforms are not explicitly covered by RBI’s moratorium. Though TReDS exists outside the regular supply chain finance system, it is a part of the working capital system, this person said.

Given the current environment, many companies are conserving cash even if they can pay, this person said. The whole ecosystem is walking on egg shells right now, he added.