By Jyoti Prakash Gadia
The targeted growth of a $5 trillion financial economy requires strong support from the MSME sector. According to recent estimates, a staggering 10.7 lakh crore is stuck in delayed payments, with around 80 per cent of this amount owed to MSMEs. Despite various measures like disallowing penal interest for delayed MSME payments as deductible expenditure, mandatory disclosure of overdue payments in audited accounts, and the introduction of platforms like the Samadhan portal and TReDS (Trade Receivables Discounting System), the problem persists.
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The TReDS platform, while a step in the right direction, is limited in its effectiveness. The platform’s reach is limited as the guidelines only permit NBFCs with an asset size greater than Rs 1,000 crore to enrol, excluding younger fintechs and therefore limiting support for micro businesses. These smaller enterprises face significant delays in payments, with median debtor days in 2020–21 standing at 195, in stark contrast to 68 days for smaller enterprises and 47 days for medium-sized companies.
To mitigate these concerns, budget 2023 proposed a change where expense deduction by buyers under Section 43B (h) is allowed only upon making the actual payment. This contrasts with the previous setup where deductions were permitted when the revenue was recognized, even if payments were not made. However, the power imbalance between small suppliers and large purchasers often leads to non-reporting and manipulation of provisions. Auditors typically use a general disclaimer about the unavailability of MSME data with the client.
A more comprehensive solution could involve making the provision under Section 43B (h) applicable to all credit-based GST transactions and linking it to the GSTN system. This would allow for instant monitoring of all credit-based transactions and help curtail non-reporting, late payments, and defaults.
Additionally, we need to develop a public rating system that highlights the payment practices of companies. Such transparency can encourage timely payments, as businesses would be wary of public perception and its impact on their reputation.
Several MSMEs eagerly hope for continued support akin to initiatives like the ECLGS, which provided significant relief through 100 per cent guarantee coverage, capped interest rates, and tailored repayment structures.
Under ECLGS, the eligibility for loans was determined based on the outstanding loan amount as of February 29, 2020, and the scheme saw several iterations (1.0 to 4.0) to cater to various sectors and administer specific pandemic-related relief measures.
On the other hand, the CGTMSE scheme, which has been in place for a longer duration, offers a guarantee cover ranging from 50 per cent to 85 per cent of the sanctioned loan amount, with the percentage depending on multiple factors. Unlike ECLGS, CGTMSE does not have an Annual Guarantee Fee (AGF) structure.
ECLGS significantly bolstered credit growth for MSMEs. Though over 18 per cent of accounts of Micro enterprises that availed funds under ECLGS turned NPAs, 65 per cent of MSMEs availed of benefits offered by ECLGS. The scheme’s guarantee acted as collateral, which was viewed by lenders as a risk mitigant.
Nearly 10 per cent of the eligible SME loans covered at present under CGTMSE are collateral-free while the rest, around 90 per cent of loans in the banking system, are collateral-backed. The ECLGS experience could inform the creation of a permanent guarantee system for MSME credit, freeing these businesses from the grip of collateral-based lending and enhancing their productivity.
Removing the tiered risk premium applied to banks and NBFCs may help improve the efficacy of the CGTMSE scheme, as doing so could encourage greater involvement and backing for smaller enterprises. Also, establishing a robust digital platform will go a considerable distance in optimizing real-time processes for sanction, disbursement, and claim settlement, enhancing the overall efficiency of the scheme.
Jyoti Prakash Gadia is Managing Director at Resurgent India. Views expressed are the author’s own