The Centre will soon issue orders to central public sector enterprises and other government agencies to mandatorily settle payments to MSMEs through the Trade Receivables Discounting System (TReDS) to quicken the pace of releasing their pending dues, setting the stage for nudging the private sector to do the same.
While the CPSEs and government agencies owe around Rs 1 lakh crore to MSMEs, the private companies owe around Rs 7 lakh crore now. While not all of these are overdue, the dues can be released faster, officials reckon.
From April 1, 2024, the Income Tax Act requires buyers to clear payments to registered MSEs within 45 days where a contract exists, or within 15 days in its absence. If payments are delayed beyond these timelines, the buyer cannot claim the expense as a tax deduction until the dues are actually paid. The provision has faced resistance from larger corporates, with many MSMEs reluctant to press for strict enforcement for fear of jeopardising business relationships.
Now, the government is adopting a different approach to resolve the issue. The department of public enterprises may issue a notification soon mandating that CPSEs route their payments through the TReDS platform rather than the usual banking channel to ensure that payments are made in 15-20 days, well within the 45-day payment window required under law.
“Once CPSEs come on board, we can nudge the private parties also to ensure that you are also onboard for this,” a senior official said.
Rs 30 Lakh Crore Credit Gap
If these Rs 8 lakh crore dues outstanding are released well within 45 days payment window, it could address more than a quarter of the Rs 30 lakh crore credit gap for the MSME sector.
Delay in releasing payment means the dues of small firms in effect means larger firms are using the pending due to manage their liquidity. While larger firms can easily access credit from the financial sector, small firms often struggle to even get loans against their dues from bigger firms.
Larger firms can pay in 15-20 days to smaller firms within the 45-day window, but often they end up getting payments after more than 100 days.
De-risking Receivables
Besides timely payments, buyer onboarding to the TReDS platform will enable MSMEs to get cheaper finance from banks against their receivables. Currently, banks offer this discounting against receivables for ‘AA’ and AAA-rated companies (buyers) invoices for their purchases from MSMEs. Receivables from lower-rated buyers are not discounted.
“We will extend a guarantee up to `10 crore through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for receivables from lower-rated companies (A- and BBB), provided the invoices are raised by MSMEs,” another official said, adding that it will open more bank funding for small firms.