[Editorial] Problem of Delayed Payments to MSMEs

What is the extent of payment delays?

  • Quantitative analysis estimates that about 10.7 lakh crore INR is stuck as such delayed payments to Indian MSMEs. This is 6% of India’s Gross Value Added (GVA) for 2020-21.
  • According to estimates, based on Dun & Bradstreet’s proprietary data and Prowess IQ, payments worth about 6.3-10.7 lakh crore INR were delayed in 2020-21.
  • With respect to the number of days of delay- micro enterprises faced 194 days delay, small enterprises 68 days and medium enterprises 46 days.

Why is delayed payment an issue for MSMEs?

  • When the payment is delayed, there is value erosion. MSMEs are already a cash strapped sector. In such a case, the value erosion is especially acute.
  • These small enterprises often borrow at comparatively higher costs and survive on very thin margins. In addition to this, they operate in a highly competitive environment.
  • Many types of costs are incurred by these enterprises- time spent, personnel costs, etc. in recovering payments.
  • Capital, that could be gainfully employed, gets locked.
  • Entrepreneurs have to forego business opportunities because of liquidity crunch caused by delayed payments. This is detrimental, not only to individual enterprises, but to the overall growth of the sector.
  • The problem of delayed payment gives the buyers an advantage that the economy can’t afford. Anecdotal evidences show that buyers, who are often big companies and PSUs, cause these delays.

How are these delays addressed?

  • Laws & regulations: as in Japan, USA and most of Europe- in addition to India. eg: USA’s Prompt Payment Act and EU’s Late Payment Directive. An issue is that they have weak enforceability and involve lengthy legal processes.
  • Market solutions: such as trade credit insurance, working capital loan and invoice discounting. Such solutions are being used in Taiwan and South Korea. The success of this route depends on coverage by formal financial institutions.
  • Moral appeal: which creates a persuasive pressure on the buyers, though it isn’t legally binding. Eg: Prompt Payments Code in UK.

In India:

  • Interest of Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993
  • MSME Development Act, 2006
  • Samadhaan platform
  • TReDS (Trade Receivables Discount System)
  • SIDBI-NSE Trade Receivable E-discounting Engine (NTREES)
  • Commercial platforms like M1xchange and RXIL

What needs to be done?

  • A call, for addressing this issue, must come from the highest levels of the government. The interventions must seek to change the business culture and strengthen enterprises across the supply chain.
  • The MSME Act, 2006 and the introduction of the SAMADHAN platform are steps in the right direction, in this regard. However, there are shortcomings.
  • The SAMADHAN portal shows nearly 1 lakh complaints, amounting to 25,000 crore INR. The low disposal rate shows a lack of necessary wherewithal to back the mechanism. This needs to be addressed.
  • The onus of making timely payment must be shifted onto the buyers. This needs regulatory interventions.
  • In addition to TReDS, there is also in-time credit and supply chain financing. Market-based solutions spell efficiency and amicability between the suppliers and the buyers. It also facilitates cash flow for these enterprises.
  • However, the fact that it rests on 2 preconditions- buyers’ intent and heightened formality of practices– is a major impediment.
  • Hence, while the businesses gear up to adopt these solutions, having a rich stack of alternative solutions is worthwhile.
  • There is a need to strengthen the associations and credit practices of these enterprises. Though individual entrepreneurs tend to develop unique value propositions for their services, there a need for co-operation towards gaining sustainable credit terms.

Conclusion:

In India, payment delays and the associated uncertainties is the norm, rather than an exception. This issue needs addressing at multiple levels. If the country is to achieve economic progress, the MSME sector must progress.

Practice question for mains:

Discuss the issue of delays in payments to MSMEs. How can it be addressed? (250 words)

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