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Addressing delayed payments to MSMEs

The malaise of delayed payments for goods supplied and services rendered continues to plague the growth of the MSME sector.

Published: 10th July 2021 01:00 AM  |   Last Updated: 10th July 2021 01:08 AM   |  A+A-

cash, money, investment

Representational Illustration (File| Express)

With more than 30% contribution to the total Gross Value Added, one-third stake in the country’s total manufacturing Gross Value of Output and a workforce of more than 11 crore people, nothing about the Micro, Small and Medium sector in India’s economy seems micro, small or medium.

The 73rd round of NSSO found 633.88 lakh unincorporated non-agriculture MSMEs in India engaged in different economic activities. However, total MSME registrations under the government-notified Udyog Aadhaar Memorandum (UAM) was only 1.02 crore. The UAM was replaced on 1 July 2020 by Udyam Registration, which is more simplified and free of cost. Till 31 March 2021, only 26.42 lakh MSMEs had registered on the Udyam registration portal. Hence, the majority of MSMEs still remain outside the purview of the organised sector and the ambit of the myriad Central and state government schemes meant for supporting them. 

One of the most severe problems faced by MSEs (Micro & Small Enterprises) is that of delayed payments for goods supplied and services rendered. This often makes them debt-ridden, eventually pushing them to the brink of insolvency. To deal with this, the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006, contains provisions for establishment of Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of such disputes at the state level. The Ministry of Micro, Small & Medium Enterprises also launched a Delayed Payment Portal—MSME Samadhaan—for micro and small entrepreneurs to directly register their cases relating to delayed payments. After 15 days of registering their cases on the portal and subject to scrutiny by MSEFC, the case is transferred to the Council.

The TReDS is an e-platform for facilitating the financing of trade receivables of the MSMEs due from corporates and government departments/PSUs through financiers like banks or other financial institutions. However, multi-party interactions and stages make it complicated for entrepreneurs. Increasing the number of stakeholders and reducing the discount charges on transactions would increase the efficacy of TReDS, further incentivising more MSMEs to utilise this platform. 
Notwithstanding the legal remedies available, this malaise continues to plague the growth of the MSME sector. Payments to MSEs remain deferred, either due to delay in proceedings (as on June 21, 30,483 applications of the total 79,747 applications filed in MSEFC are yet to be viewed by the Council), non-compliance with the orders or lack of financial resources with the buyer unit itself. Whichever the case, the sufferer is the MSE unit. Working capital is the lifeblood for MSMEs and delayed payments are sucking it dry for them. Micro and small enterprises remain more vulnerable to liquidity issues and the post-Covid demand crash has only added fuel to the fire.

To ensure that the continuum of working capital for micro and small units is uninterrupted, a permanent MSE fund may be created. The corpus of this fund may be utilised to pay the entrepreneurs of MSE units after passing of order by MSEFC. The unit originally liable to pay shall then deposit the entire due amount within a stipulated time into the fund. The interest amount may be directly paid to the supplier unit. Failure to deposit the amount in time would invite stringent legal action.
Such a fund may be created at the state level by the Centre in partnership with state governments. Since maintaining any fund requires expertise and diligence, a financial institution may be roped in for this purpose. The fund may be maintained by any such institution selected through a formal screening process.

As on 1 June 2021, out of 32,420 cases actually filed with MSEFC involving an amount of Rs 11,816 crore, only 10,739 cases with an amount totalling Rs 2,466 crore have been disposed of. What a shot in the arm it would be for the cash-starved MSME sector if there would be a quick disposal and disbursal of the amount in these pending cases from the suggested fund. There is also a simultaneous need for more MSEFCs at the state level for this to materialise.

Given the huge financial crunch, it’ll be a Herculean task for the government to dive into its coffers for more resources. However, a simple reallocation of resources may come to the rescue. Under the Atmanirbhar Bharat package, Emergency Credit Line Guarantee Scheme (ECLGS) was announced to help mitigate some of the distress caused to the MSME sector due to sudden demand fall. The main objective of ECLGS was to provide collateral-free additional funding of up to `3 lakh crore to MSME borrowers. The amount of guaranteed emergency credit line funding to eligible MSME borrowers was to be 20% of their entire outstanding credit up to `25 crore as on 29 February 2020. 

The scheme was further extended to include more sectors and firms with larger credit exposure through subsequent revisions in the form of ECLGS 2.0, 3.0 and most recently 4.0. The last date for applications has also been commensurately revised till 30 September 2021. Recently, the funding under ECLGS has been raised to `4.5 lakh crore. However, what needs to be noted is that the Indian economy has been grappling with a slowdown since 2018. Many businesses were, therefore, already struggling to stay afloat and had turned SMA2 or NPA by February 2021, which rendered them ineligible for ECLGS. Secondly, a significant portion of MSMEs are based out of rural areas with low access to formal credit and hence, function through informal credit channels or rely on their own working capital. The ECLGS excludes such MSMEs. This may be why the designated amount under the scheme couldn’t be disbursed and its outreach and validity had to be expanded. 

Some funding assistance under ECLGS can be used at first for settling the claims under MSEFC, thus providing the initial support for such a fund. Recurrent financing won’t be needed since all units liable to pay would be required to pay back. Establishing such a fund will reinforce trust in MSEFC and encourage more entrepreneurs to go for registration, thereby, increasing formalisation and addressing the chronic issue of deferred payments through a much-yearned-for elixir for the MSME sector of our economy.

Nitisha Mann
Indian Economic Service officer & Deputy Director, MSME-DI, Cuttack
(Views expressed are personal)



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