Small businesses’ new weapon against big firms: IBC gives MSMEs this power to collect dues

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Published: November 4, 2019 6:26:09 PM

Credit and Finance for MSMEs: The Insolvency and Bankruptcy Board of India (IBBI) has now made it compulsory for the buyers of MSME products to confirm the pending invoices from their operational creditors based on the queries received by information utility (IU) companies.

IU NeSL will make the names of such organisations defaulting on MSME payments public.

Credit and Finance for MSMEs: To help MSMEs tide over their problem of delayed payments by large businesses, the Insolvency and Bankruptcy Board of India (IBBI) has now made it compulsory for the buyers of MSME products to confirm the pending invoices from their operational creditors based on the queries received by information utility (IU) companies, Vinod Kumar, President, India SME Forum, told Financial Express Online. This was primarily a part of the recommendation made by the UK Sinha Committee report on MSME growth to RBI in June this year. “According to the report, there has to be some utility where MSMEs should normally upload their bills for which if the closure will not be filed in required time then automatically that information will be relayed to NeSL so that large businesses not paying continuously can be bracketed,” added Kumar.

IU National E-Governance Services Limited (NeSL), registered with IBBI, will make the names of such organisations defaulting on MSME payments public that might raise the eyebrows of their lenders when they approach them for raising capital. “This is a great move by the body and they should be congratulated as large companies have been misusing and blackmailing MSMEs while MSMEs are too small in size and weak to fight them. The criminal act should be added to it. MSMEs are already reeling under the payment issue and e-commerce impact. Naming them publicly will certainly impact them and if not then at least they will be ashamed for not paying small businesses on time,” Vishwanath, outgoing Chairman, MSMEs Committee, PHD Chamber told Financial Express Online.

Also read: Amazon’s walk in, walk out, Go stores allow you to leave without paying; here’s how it works

Naming and shaming are being used quite effectively in countries like the UK and other European nations, the report said adding that filing of default by the operational creditors and submission of information to IU serves as an early warning signal to other financial or operational creditors with exposure to the defaulting debtor. “There is a section in the Insolvency and Bankruptcy Code that mandates the financial creditors to submit financial information on defaults to an IU in bankruptcy cases before admission of cases in NCLT. It is desirable that the claims they make should be sacrosanct. The process should move faster. Hence, the admission will be quicker in the NCLT as it doesn’t need to have an elaborate hearing to decide if there is a default or not with IU having the details of the defaulting firm,” Dr M.S Sahoo, Chairperson, IBBI told Financial Express Online.

Finance minister Nirmala Sitharaman had last month said that banks have been asked to offer bill discounting service to small businesses against payments pending from large businesses. Rs 40,000 crore in dues are pending to MSMEs, according to the returns filed by businesses with the Corporate Affairs Ministry, the minister had said.

Factoring is a possible solution for problems of cash-starved MSME Sector. “In several economies across the globe, especially in the UK, EU Zone and lately in China factoring help address liquidity issues. Factoring helps transfer payment risk from a smaller and relatively weaker enterprise to a larger (and presumably having access to better financial resources) corporate buyer,” said Sundeep Mohindru, Founder Director, Mynd Solutions (that runs factoring service M1Xchange) had told Financial Express Online.

As a product, factoring in India did not take off but today Trade Receivables Discounting System (TReDS) has boosted factoring. “The three TReDS platforms approved by the RBI has done business worth Rs 9,000 crores and about 5,000 MSME vendors have digitally availed collateral-free, without recourse factoring based on competitive bidding by almost the entire banking sector and two factoring companies,” added Mohindru. However, a lot of MSMEs don’t indulge in factoring. “Particularly micro and small units don’t have that much brain and money power to do that,” said Vishwanath.

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