It’s now time to regulate invoice discounting

livemint.com:

₹10 lakh on a seemingly safe asset, i.e., invoice discounting. She has a finance background and is unlike most retail investors who do not understand the risks of exotic financial products. She had invested via an online platform towards discounting an invoice payable by a leading e-commerce company.

However, the e-commerce platform found some of the earlier consignments from the concerned seller defective and withheld the payment of this invoice. As an investor, my friend had no recourse to the defaulted amount. Invoice discounting for retail investors is an unregulated space.

The Reserve Bank of India (RBI) has created trade receivables discounting system (TReDS) to regulate invoice discounting among micro, small and medium enterprises (MSMEs), large corporates, and financiers. Retail investors seek unregulated online platforms that offer attractive returns through invoice discounting. My friend’s experience has valuable learnings for other retail investors.

Retail investors often perceive invoice receivables as substantial collateral that guarantees capital protection. On the contrary, an invoice receivable is an operational debt. Corporate buyers can delay payments against such invoices without any impact on their credit rating.

Even a well-known corporate buyer may raise disputes and withhold payments against invoice receivables. Some online platforms claim they only offer invoices accepted and approved by buyers for discounting. But there are plenty of cases where the buyer has denied the payment on the due date.

Retail investors must bear the losses without any downside protection in these situations. My friend used the corporate reputation of the buyer as a proxy for payment guarantee. However, even reputed