Budget 2026 Proposes Secondary Market for MSME Invoices via Asset-Backed Securities
In a significant move aimed at bolstering funding for micro, small and medium enterprises (MSMEs), the government on Sunday proposed creating a secondary market for MSME invoices by allowing these receivables to be packaged as asset-backed securities. This reform is part of a broader set of changes to the Reserve Bank of India–run Trade Receivables Discounting System (TReDS).
Budget Announcement and Key Proposal
Presenting the Union Budget for 2026-27, Finance Minister Nirmala Sitharaman proposed to introduce TReDS receivables as asset-backed securities, which will help develop a secondary market, thereby enhancing liquidity and settlement of transactions. The proposal specifically aims to broaden funding avenues for MSMEs by turning verified invoices into tradable instruments.
This initiative enables banks and non-banking financial companies (NBFCs) to recycle capital more efficiently and attract longer-term investors. Asset-backed securities are created by pooling loans or receivables and selling them to investors through a process known as securitization, with investors being repaid from the cash flows of the underlying assets.
Industry Response and Expert Insights
Industry experts have largely welcomed this reform. Sanjay Doshi, partner and head of transaction services and financial services advisory at KPMG in India, stated, Recognizing TReDS receivables as asset‑backed securities would fundamentally elevate MSME financing by transforming verified invoices into a trusted investment asset. According to Doshi, this shift can attract deeper institutional capital, lower the cost of working capital for MSMEs, and create a more liquid, transparent, and resilient credit ecosystem.
Vinod Kumar, president of the India SME Forum, which represents about 97,000 businesses, explained the mechanism in simple terms: Invoices raised by MSMEs and financed on the TReDS platform will be pooled and converted into tradable securities. 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.
Challenges and Market Dynamics
However, some market participants have cautioned that building investor appetite may be challenging. Short-term loans financing such transactions typically yield about 8-9% when the buyer is a well-rated company. Since asset-backed securities, pooled from a clutch of such bills, are sold at a discount, investors may be reluctant to buy instruments that yield below roughly 8%, experts noted.
While there is no separate data for securitization of receivables, rating agency Icra Ltd estimates that overall securitisation volumes grew 2% year-on-year to ₹1.87 trillion in the first nine months of FY26. This growth was driven by a few large corporate transactions, indicating potential for expansion into the MSME sector.
Context and Broader Implications
The proposal comes against a backdrop where banks and NBFCs have been reluctant to lend to MSMEs, leading to low disbursals under flagship schemes such as the PM Employment Guarantee Programme for MSMEs. Reserve Bank of India governor Sanjay Malhotra, in early January, had urged lenders to maintain sound underwriting standards and closely monitor loan quality.
Experts also described the move as a positive step toward easing access to capital for cash-strapped MSMEs. Veeramani C, professor and director at the Centre for Development Studies, a think tank, said, The asset-backed securitisation can lead to access to capital for MSMEs. He acknowledged that adoption will take time, with businesses that are part of the GST regime and possess the necessary certifications to issue legitimate invoices likely to be the main beneficiaries.
Kumar added, Asset-backed securities on TReDS can transform MSME receivables into a scalable, low-cost funding channel—provided underwriting discipline, transparency, and risk safeguards are maintained. Done right, this is a structural reform, not a scheme.
