Liquidity unlocked, access denied: With rating rules, how TReDS leaves most MSMEs behind

Finance has always been a perennial problem for micro, small, and medium enterprises (MSMEs) in the country. In the Union Budget 2026-27, Finance Minister Nirmala Sitharaman announced scaling up the Trade Receivables Discounting System (TReDS) to alleviate MSMEs’ credit flow.

The platform has so far unlocked more than Rs 7 lakh crore in liquidity. To further expand its reach, the government, in the Budget, proposed making TReDS mandatory for all CPSE procurement from MSMEs while encouraging private sector adoption.

In line with the government’s TreDS push, the Reserve Bank of India (RBI) in its April monetary policy announced that it will simplify TreDS onboarding norms by removing due diligence requirements for MSMEs. The change, it says, is aimed at easing registration and accelerating access to funds. “It is proposed to dispense with the requirement of due diligence of MSMEs while onboarding on TReDS platforms,” says RBI Governor Sanjay Malhotra during the policy announcement.

For the uninitiated, TReDS is an RBI-regulated digital platform, launched in 2014, that enables MSMEs to quickly convert invoices into cash by auctioning them to banks and non-banking finance companies (NBFCs), without the need for collateral, helping ease working capital constraints. As of early 2026, TReDS has facilitated more than Rs 3.5 lakh crore in cumulative invoice financing, according to government data.

Despite the policy push on TReDS, experts, however, say the RBI’s proposal lacks clarity and fails to address the core challenge; credit ratings remain a persistent bottleneck. They argue that TReDS works well for MSME-large corporate deals but is less robust for unrated “small-to-small” transactions.

They explain, “On TReDS, the financier bears the risk if the buyer defaults, making the lenders wary when the purchaser is small, unrated, or financially weak, as underwriting such entities is both costly and risky. As a result, a credit gap emerges.”

The platform works best when MSME sellers transact with large, creditworthy corporations, according to them. “But when both—buyer and seller—are small, the lack of a strong credit profile makes invoice discounting difficult, and the problem is compounded by limited digital readiness among small buyers, who may struggle to approve invoices on time,” they note.

“The core issue lies in the requirement for an investment-grade credit rating of BBB and above A, AA, or AAA, while avoiding lower-rated entities for participation on the TReDS platform. Out of nearly 60 million MSMEs in India, only a negligible number, estimated at fewer than 10, currently meet this threshold. As a result, invoices raised on such MSMEs cannot be discounted by their suppliers through NBFCs or other financiers on the platform, limiting access to formal liquidity,” says Pankaj Chadha, Chairman of the Engineering Export Promotion Council of India (EEPC India).

According to Chadha, the fundamental issue lies within the credit rating framework itself. Rating agencies assess firms across all sizes using uniform benchmarks, without adequately accounting for scale differences. “This means a small MSME, for instance in the steel sector, is evaluated against large corporations, creating a structural disadvantage,” says Chadha.

He notes that the parameters such as financials, returns, and operational metrics are not contextualised to the MSME segment, making it difficult for smaller firms to achieve investment-grade ratings. As a result, firms without BBB-or-higher ratings face higher collateral requirements and are effectively excluded from bill discounting platforms such as TReDS, he observes.

In fact, industry stakeholders have raised this matter with the banking regulator, suggesting that while rating methodologies may remain unchanged, benchmarking should be peer-based. They believe that introducing slabs within the MSME segment and comparing firms of similar size and capacity could facilitate more realistic assessments.

“The matter has been taken up with the RBI. The proposal has been acknowledged and referred to the relevant internal team for examination. Discussions are ongoing, and stakeholders have sought a formal consultation to arrive at a workable solution,” informs Chadha. “The issue remains under consideration, with expectations of progress in the coming months. It’s still a work in progress,” he says.

Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small and Medium Enterprises (FISME), expressed similar concerns, noting that MSMEs in India face a structural disadvantage under the current credit rating framework, which is largely designed for large, listed corporates and long-term investment risk assessment.

He pointed out that, as highlighted by FISME to the RBI, rating models disproportionately focus on scale, capital structure, and market share, resulting in most MSMEs being clustered in the BBB or below category, regardless of their repayment track record. “This creates a systemic bias, where even viable enterprises are classified as sub-investment grade, resulting in higher borrowing costs, additional collateral requirements and restricted access to credit,” he says.

“Although the RBI has clarified that external ratings are not mandatory, banks, particularly public sector banks (PSBs), continue to insist on them, making ratings a de facto requirement,” says Bhardwaj. “Concerns around opaque pricing, limited competition among rating agencies, weak sectoral understanding, and lack of effective grievance redressal further compound the problem, turning ratings into a barrier rather than an enabler of MSME finance,” he adds.

With most MSMEs structurally rated BBB or below due to scale biases, experts say, these businesses face restricted access to finance or higher discounting costs, despite TReDS risk being driven largely by the buyer’s creditworthiness, not the MSME supplier.
“By using MSME ratings as a filtering criterion, the system mis-specifies risk and undermines the very objective of TReDS, which is to ease working capital constraints. Additionally, benchmarking MSMEs against large corporates further distorts risk perception, leading to fewer bids, higher financing costs, and inefficient price discovery, thereby limiting the platform’s effectiveness as a liquidity tool,” says Bhardwaj.

Something more fundamental is at play here.

An email seeking RBI’s response on the issue remained unanswered at the time of publication.

Deeper systemic issues
Experts say the TReDS challenges reflect deeper systemic issues in MSME credit access in India, with a fundamental mismatch between risk assessment models and the realities of MSME operations. Lenders over-rely on ratings and bureau scores, overlooking ground realities like delayed payments, sector volatility, and cash-flow cycles.

“There is also a clear institutional bias in favour of large corporates, which often enjoy better ratings despite questionable trade practices, while MSMEs are penalised for temporary or technical stress. Fragmentation across TReDS platforms, lack of interoperability, and uneven participation by financiers further mirror the broader inefficiencies in the credit ecosystem,” says Bhardwaj.

Vikesh Agrawal, COO of solar finance provider NetZero Finance, says banks rely on internal credit models, but with over 63 million MSMEs, most remain unrated. The credit rating agencies need structured, regularly updated data, yet many ratings lapse as “Issuer Not Co-operating (INC)” due to compliance challenges, adds Agrawal.

“Credit ratings act as a two-sided sword; unrated MSMEs face lower risk weights (under Basel framework) than those rated below investment grade (BBB-), which increases banks’ regulatory capital adequacy burdens (20%-150% risk weights),” says Agrawal.

According to the RBI’s 2024-25 Annual Report, MSME credit outstanding stands at Rs 25.6 lakh crore, yet a CRISIL study indicates 60-70% of MSMEs remain unrated or below investment grade, limiting TReDS access. RBI data shows only 18% of eligible MSMEs actively use TReDS. As per industry body FICCI’s estimate, there is a gap of Rs 10 lakh crore in invoice financing.

Sundeep Mohindru, Founder & Promoter, M1xchange, says the MSMEs are rated in isolation despite trade-linked risk; many remain unrated or sub-investment grade, which limits credit and forces them to costly borrowing (16-24%), even though invoice discounting places the risk on the buyer, rather than the MSME.
“Ratings continue to evaluate MSMEs independently based on their balance sheet, without adequately factoring in supply chain linkages. This traditional methodology ignores rich transaction data, such as golden sources like GST filings, banking flows, and receivables behaviour, which are far more indicative of repayment capacity. This creates a structural disconnect; even operationally strong MSMEs, embedded in credible supply chains, remain excluded, highlighting that the issue is not just risk perception, but a misalignment between how creditworthiness is assessed and how MSMEs actually function,” adds Mohindru.

“It’s important to clarify that on TReDS, financing is fundamentally anchored to the buyer’s credit profile rather than the MSME’s standalone rating, which is why discounting rates typically have a super-prime range of RoI offered, ranging from nearly 7-10%. However, constraints emerge when MSMEs supply to lower-rated or unrated buyers; liquidity becomes limited as financiers naturally gravitate towards higher-rated counterparties, restricting participation,” notes Mohindru.

To overcome this constraint, the government, however, has introduced the CGTMSE scheme for securing the credit of low-rated or unrated buyers. As a result, banks or NBFCs will get confidence to finance the receivables of MSMEs supplying to such buyers.

Neha Bahadur, General Manager-Head of Business, C2treds, says MSMEs supplying to lower-rated buyers face limited discounting access—BBB+ thresholds and benchmarking against large corporates distort risk assessment, indirectly excluding even sound businesses. “This results in limited participation, even though TReDS is designed as an invoice-backed financing mechanism. As industry data shows, despite strong growth, TReDS still covers only a small portion of overall MSME receivables, indicating structural constraints in scaling access,” adds Bahadur.

However, Pratik Singhania, Vice President and Head-Credit Policy, ICRA, says credit ratings must remain relative to ensure comparability and transparency, as they guide capital norms, exposure limits, and risk-based pricing, enabling consistent risk differentiation across entities regardless of size, sector, or structure.

Singhania says TReDS invoices are discounted “without recourse” to MSMEs, with risk assessed on the buyer’s profile. “So, an MSME’s own rating does not materially limit its participation on TReDS, as the buyer’s creditworthiness is the key driver of the transaction,” adds Singhania.

Need for a differentiated MSME rating framework
Chadha says they have flagged this to the banking regulator, asking it to retain methodologies but shift to peer-based benchmarking with MSME slabs by size or capacity for more realistic assessments.

Bhardwaj says, “I think there is a compelling case for a differentiated rating mechanism tailored specifically to MSMEs, in line with global best practices where small businesses are assessed using portfolio-based and cash-flow-driven approaches rather than capital market frameworks.”

“Such a mechanism should prioritise real-time cash-flow analysis using GST data, bank transaction history, and receivables cycles, instead of relying predominantly on balance-sheet strength. It should incorporate transaction-level risk, especially in platforms like TReDS, by anchoring credit assessment to the buyer’s creditworthiness,” adds Bhardwaj.

The ratings should weigh behavioural metrics, account conduct, repayment discipline, and banking history, along with sector risks, say experts. “The shift needs to be towards transaction- and cash flow-based assessment, where creditworthiness is evaluated on the basis of real business activity rather than static financials. This includes leveraging banking and GST data, assessing the strength of an MSME’s relationship with its buyers, analysing receivables quality and payment track record, and incorporating behavioural indicators, such as repayment discipline and transaction consistency,” adds Mohindru.

Agrawal said ample data in the form of GST (over 140 million entities) and bank statements can power a robust framework. A robust framework can use GST to map supplier-buyer links and ecosystem scores, assess plant or machinery, output vs capacity, and team credentials, triangulate with purchase-sales data to verify formal operations, and score cash sales via assessed income, he adds.

“Given digital availability, credit rating agencies can test scoring models for ongoing monitoring, standardising evolved surrogate lending models from MSME-focused banks and NBFCs. This prevents ratings from lapsing into 'Issuer not cooperating' status, enabling seamless data provision,” adds Agrawal.

Bahadur acknowledges that the system must shift to transaction-and cash-flow-based risk assessment, factoring in buyer–supplier history, GST or e-invoicing data, payment behaviour, and credit enhancements like insurance or guarantees.

The rating agencies introduced a separate SME grading scale for better differentiation, and after SEBI’s September 2018 notification, they moved this activity to dedicated group entities; experts believe this can be used to enable a more meaningful relative differentiation among MSMEs.

“Such SME gradings can be used by market participants to supplement conventional credit ratings and facilitate a more nuanced assessment of MSMEs based on their relative strengths and risk characteristics,” says Singhania.