Date: 7 Nov 2019
MSME’s are considered the backbone of the Indian economy given their sizeable contribution to GDP, Employment, exports and other key socio-economical parameters. However, they face challenges making business difficult to grow and sustain. A key problem common to the sector is delayed payments and in recent times, this problem has only aggravated. While a lot is discussed on the credit availability to MSMEs; however it seems that delayed payments pose more challenges than access to formal credit. The elongated debtor cycle further adds to the working capital requirements, adversely impacting the cash flows.
SME’s are big suppliers to PSU’s and large corporates where the supply terms are time bound and quality sensitive. However when it comes to payments for the goods or services supplied the terms gets skewed towards the buyers. Indian markets have a culture of working on verbal and relationship trades rather than written contracts which also adds to the uncertainties and disputes both at suppliers and buyers end. Additionally where the formal contracts are made the SME’s are on a weak footing owing to skewed terms towards the buyers besides business owners avoiding taking legal recourse due to lack of time and resources.
The genesis of delayed payment lies in the business culture where the party paying is superior, precipitousness of owners to push sales, non-enforcement of contracts, financial mismanagement of SME’s w.r.t the accounting procedures besides others. The solutions lies partly in the hands of the SME’s themselves and partly with the government and prevalent culture in the country. The recent initiatives by the government, financial discipline within SME’s, availability of factoring services and new regulations have emerged as possible solutions to tackle these payment delays.
Government initiatives:
- The Reserve Bank of India (RBI) has allowed three players to launch Trade Receivables Discounting System (TReDS) — a digital platform where small businesses (MSMEs) can get access to capital by auctioning their trade receivables. It is an electronic platform that allows auctioning of trade receivable. The process is also commonly known as ‘bills discounting’, a financier (typically a bank) buying a bill (trade receivable) from a seller of goods before it’s due or before the buyer credits the value of the bill. In other words, a seller gets credit against a bill which is due to him at a later date. The discount is the interest paid to the financier.
- MSME ministry launched a delayed payment portal, MSME Samadhaan, on October 30, 2017. Medium enterprises are not eligible to submit applications at Samadhaan and only MSEs having Udyog Aadhaar Number (UAN), a unique identity number obtained after registration for Udyog Aadhaar Memorandum (UAM), are eligible to apply at the portal for lodging complaints on delayed payment.
- RBI has set up a panel headed by former SEBI chairman Mr U.K. Sinha to review the framework for MSMEs, and suggest long-term solutions for economic and financial sustainability for the sector, study the impact of recent economic reforms, and identify the structural problems impacting its growth. The government is planning suitable legislation on the recommendations of the committee.
Laws & regulations:
- Indian bankruptcy code allows a MSME to take a company to National Company Law Tribunal for recovery if the dues are over Rs.1 lakh.
- MSME Act, 2006 deals with the issue of delayed payments to MSME. And Section 15 of the said Act mandates that the supplier of goods and services shall be legally entitled to receive payment within 45 days of the supply of goods or service and where any buyer fails to make payment after the period shall be liable to pay compound interest @ 3 times the rate notified by RBI. In case of failure of the buyer to make payment of amount with compound interest the supplier can refer the matter to the MSME Facilitation Council for further resolution.
Financial Discipline within MSME’s:
- MSME businesses need to be well aware of the payment terms at the time of entering the contracts and should comply with the procedural requirements which can help with timely payments.
- The accounts team needs to be aware of the buyer’s payment cycle and submit the invoices accordingly.
- The tax invoices have to be error free and should be GST compliant so that the payments are not delayed for resubmission.
Way Ahead
The MSME’s have their own inherent problems owing to their size and the government push to formalise the economy has further aggravated their challenges. They need to embrace change and prepare themselves for thriving in the new disrupting environment. It is their resilience, combined with the initiatives taken by the government and private sector participation which is holding a promising future.
