The Indian government has proposed a significant reform to boost liquidity and expand funding options for micro, small, and medium enterprises (MSMEs). Announced in the 2026-27 (April 2026 to March 2027) Union Budget, the plan introduces a secondary market for MSME invoices by allowing these receivables to be packaged as asset-backed securities through the Trade Receivables Discounting System (TReDS). 

This move is expected to transform MSME financing by creating tradable instruments from verified invoices, attracting long-term investors, and improving capital recycling for banks and non-banking financial companies (NBFCs).

India’s finance minister, Nirmala Sitharaman, introduced “TReDS receivables as asset-backed securities, helping develop a secondary market, enhancing liquidity and settlement of transactions.”

What is the background and rationale?

MSMEs form a vital part of India’s economy, contributing around 45% of exports and roughly 30% to the GDP. However, access to timely and affordable credit remains a persistent challenge for many small businesses. Traditional lending mechanisms often fall short, leading to liquidity constraints that hamper growth and operational efficiency.

TReDS, regulated by the Reserve Bank of India, is an electronic platform that facilitates invoice discounting for MSMEs. It enables MSMEs to receive early payments against invoices raised on large corporates, improving working capital without collateral. Despite its benefits, the current system limits liquidity as banks and NBFCs hold these invoices on their balance sheets until maturity.

The Indian government’s proposal to securitise TReDS receivables aims to address this limitation by pooling invoices into asset-backed securities (ABS) and selling them to institutional investors, including mutual fund houses, pension funds, and insurance companies. This securitisation process will unlock fresh capital, reduce funding costs, and create a more liquid and transparent credit ecosystem for MSMEs. 

It is also likely that the Government e-Marketplace (GeM) portal will be linked with TReDS. This will facilitate information sharing, including government purchases from MSMEs to financiers.

In her Budget speech, Sitharaman quoted “With TReDS, more than ₹7 lakh crore (approx. USD 77.78 billion) has been made available to MSMEs. To leverage its full potential, I propose 4 measures: mandate TReDS as the transaction settlement platform for all purchases from MSMEs by CPSEs, serving as a benchmark for other corporates; introduce a credit guarantee support mechanism through Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for invoice discounting on the TReDS platform; link GeM with TReDS for sharing information with financiers about Indian government purchases from MSMEs, encouraging cheaper and quicker financing; and introduce TReDS receivables as asset-backed securities, helping develop a secondary market, enhancing liquidity and settlement of transactions.

MSMEs with an annual turnover above ₹250 crore (approx. USD 28 million) are required to do TReDS registration for MSME payments.

How the secondary market will work and the expected benefits 

Under the new framework, verified MSME invoices uploaded on TReDS will be bundled into ABS. These securities can be traded in a secondary market, enabling banks and NBFCs to sell receivables and recycle capital more effectively. Investors will earn returns from the cash flows generated by the underlying invoices.

This approach is expected to attract deeper institutional capital into MSME financing, lowering the cost of working capital and supporting the growth of small businesses. 

The Indian government has emphasised the need for underwriting discipline, transparency, and risk safeguards to ensure the market’s stability and scalability.

Experts view the proposal as a structural reform rather than a temporary scheme. By transforming MSME receivables into trusted investment assets, the secondary market can significantly enhance liquidity and access to funding for cash-strapped MSMEs.

Industry groups have broadly welcomed the move. Vinod Kumar, president of the India SME Forum, quoted, “In simple terms, invoices raised by MSMEs and financed on the TReDS platform will be pooled and converted into tradable securities,” said Vinod Kumar, president of the India SME Forum, which represents about 97,000 businesses. Instead of banks or NBFCs holding MSME invoices on their balance sheets until maturity, they can bundle hundreds or thousands of receivables and sell them as asset-backed securities to long-term investors such as mutual funds, insurance companies and pension funds.”

Ketan Gaikwad, MD & CEO, RXIL, said, “The proposed extension of CGTMSE credit guarantee support to invoice discounting on TReDS further deepens the availability of working capital for MSMEs and will enable TReDS platforms to onboard a wider and more diverse MSME base. Linking the GeM portal with TReDS for sharing information with the financiers will be a major enabler, allowing MSME suppliers access to quicker and cheaper financing in a seamless manner, especially when combined with CPSE participation and credit guarantees.”

“ The proposal to introduce trade receivables as asset-backed securities is a forward-looking reform that has the potential to unlock additional liquidity by attracting new classes of investors and developing a secondary market for MSME receivables. We look forward to further details on this framework and believe it can meaningfully enhance market depth, liquidity, and settlement efficiency for MSME financing in the years ahead,” he added. 

However, some market participants caution that building investor appetite may take time. Since short-term loans on such invoices typically yield 8-9% when the buyer is a well-rated company, pooled ABS sold at a discount may offer lower yields, potentially limiting initial demand.

India’s complementary measures to support MSMEs

Alongside the secondary market proposal, the Indian government has mandated TReDS as the transaction settlement platform for all purchases from MSMEs by Central Public Sector Enterprises (CPSEs). This move is expected to standardise invoice discounting and improve payment transparency.

Additionally, India also plans to introduce a credit guarantee support mechanism through the Credit Guarantee Fund Trust for Micro and Small Enterprises to back invoice discounting on TReDS. This guarantee will provide partial coverage to lenders in the event of buyer defaults, further mitigating risk and encouraging financing.

The Indian Budget also includes a ₹10,000 crore (approx. USD 1 billion) SME Growth Fund to develop future MSME champions and a ₹2,000 crore (approx. 222 million) top-up to the Self-Reliant India Fund to maintain micro-enterprises’ access to risk capital.

A turning point for MSME financing 

While the secondary market for MSME invoices via TReDS securitisation promises to improve liquidity and reduce financing costs, its success will depend on several factors. These include maintaining robust underwriting standards, ensuring transparency, and building investor confidence in the new asset class.

The Reserve Bank of India and market regulators will play a critical role in overseeing the development of this market and addressing operational challenges. Adoption is likely to be gradual, with GST-compliant and certified MSMEs benefiting first.

If implemented effectively, this could transform MSME financing by allowing small businesses to secure longer-term capital, enhance cash flow management, and better support India’s economic growth.