Micro, small and medium enterprises (MSMEs) are the backbone of India’s economy. However, delayed payments from large buyers impair their growth. This blog summarizes the core issues and solutions.
What is the scale of the problem?
MSMEs comprise over 90% of businesses in India and employ millions. Delayed payments severely affect their viability. Surveys estimate over 60% of MSME payments are delayed beyond agreed credit periods, hurting cash flows.
Why do payment delays happen?
- The market dominance of large buyers – MSMEs depend on big corporate clients who control supply chains and often arbitrarily extend payment terms.
- Weak bargaining power – MSMEs lack leverage in negotiations with large corporations to push for timely payments.
- Legal recourse difficulties – Costly lawsuits deter MSMEs from pursuing legal action against powerful defaulting clients.
What is the impact on MSMEs?
- Working capital crunch – Delayed receivables strain the limited working capital of MSMEs, hampering day-to-day operations.
- Higher borrowing costs – To fund the cash gap, MSMEs resort to costlier financing from money lenders driving up expenses.
- Lost growth opportunities – Lack of working capital prevents capacity expansion and investments in tech upgrades by MSMEs.
Government intervention:
- MSME Development Act 2006 – Mandates a maximum 45-day credit period and monthly interest penalty on late payments. Poor enforcement renders it ineffective.
- MSEFC Act 2012 – Micro and Small Enterprises Facilitation Councils for expedited legal remedy. But high costs remain a barrier.
TReDS Platforms – Receivables Exchange facilitates discounted early payment for MSME invoices to large buyers. Adoption levels are still low.
Key solutions:
TReDS (Trade Receivables Discounting System) platforms like RXIL, A-Treds, and M1Xchange enable MSMEs to get early payment on their invoices by auctioning them to investors at a slight discount. This provides vital cash flow relief. However, adoption remains low due to limited participation and awareness. Concerted efforts to onboard major buyers and educate MSMEs on the benefits can drive greater TReDS usage.
The legal dispute resolution mechanisms under the MSEFC Act 2012 aimed to help MSMEs cost-effectively claim overdue payments. However high legal costs and delays still deter many. Simplified procedures, expedited benches, and pro bono legal aid can make justice more accessible. Regulators must also crack down on chronic late payers through fines and restrictions to change behaviours. Better tracking of payment cycles and compliance through online portals can aid monitoring and enforcement.
Recap:
- Strict enforcement of existing laws on payment terms and penalties. Make compliance the norm.
- Lower legal costs and easier dispute resolution mechanisms for MSMEs to claim their dues.
- Incentives for corporate buyers to promptly clear dues and use TReDS platforms. Boost adoption.
- Develop a payment rating system for buyers. Recognize compliant ones. Name and shame defaulters.
The way forward:
Healthy cashflows are vital for MSME competitiveness and growth. Joint action by government, industry, and MSME bodies is needed to enable timely payments. The gains for India’s economy will be exponential.
