CIO & LEADER-Issue-01-April 2018 (1)
Insight Blockchain’s Red Hot Indian Use Case: Invoice Discounting Risks such as double financing can be completely avoided using blockchain. That is what is driving the usage blockchain for receivables financing By Shyamanuja Das 26 CIO&LEADER | April 2018
Insight T The yet-unnamed blockchain, built on HyperLedger Fabric, will be used to secure recievables financing This month, three Indian factoring exchanges and the American blockchain technology firm MonetaGo announced launching of a fullfledged blockchain. The yet-unnamed blockchain, built on HyperLedger Fabric, will be used to secure receivables financing. The three factoring exchanges involved are: RXIL or Receivables Exchange of India (RXIL), a joint venture between NSE Strategic Investment Corporation Ltd (NSICL) and Small Industries Development Bank of India (SIDBI) A.TReDS, a joint venture between Axis Bank and mjunction Services M1xchange, operated by Mynd Solutions RXIL, Axis Bank and Mynd Solutions were licensed by the Reserve Bank of India to operate Trade Receivables Discounting System (TReDS), as the service is known in regulatory parlance, in November 2015. MonetaGo, a New Yorkbased technology firm, is an old India hand. It was the primary technology supplier for a blockchain trial conducted by Institute of Development & Research in Banking Technology (IDRBT), RBI’s research arm, in January 2017. National Payment Corporation of India (NPCI) and multiple banks participated in the trial, which incidentally was also around trade finance and was also built on Hyperledger Fabric. Tech-leveraged Invoice Discounting The process of bundling and selling invoices at a discount, is a major source of working capital finance for small and medium (MSME) companies. Suppliers to any large company are paid typically in 30 to 120 days. But since the MSME needs working capital, financial companies buy the invoices at a discount and provide finance to the MSMEs and later collect the money from the buyer. Because the invoices are bought at a discounted rate, the practice is popularly known as invoice discounting, While the practice itself is quite old, in the last few years technology platforms are being used to make the process faster and efficient. The platforms work like any auctioning platform. Typically, a seller uploads an invoice on the platform, which is approved by the buyer. Once approved by the buyer, the invoice becomes a factoring unit and is auctioned on the platform which the financiers try to buy by entering their discounting rate. After the final bid is accepted by the seller (or the buyer, in case the buyer is bearing the interest rate), the TReDS platform settles the trade. The financier is debited and the supplier is credited. The shift to new technology-based platforms is catalysed by RBI’s proactive stance to promote the usage along with rapid developments in financial technologies. This stems from the Government’s thrust on energizing the MSME segment to drive economic growth. RBI came up with a concept paper, Micro, Small & Medium Enterprise Factoring-Trade Receivables April 2018 | CIO&LEADER 27
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Insight<br />
Blockchain’s Red<br />
Hot Indian Use Case:<br />
Invoice Discounting<br />
Risks such as double financing can be completely<br />
avoided using blockchain. That is what is driving the<br />
usage blockchain for receivables financing<br />
By Shyamanuja Das<br />
26 <strong>CIO</strong>&<strong>LEADER</strong> | <strong>April</strong> 2<strong>01</strong>8
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