Credit and Finance for MSMEs: The seemingly intractable problem of delayed payments faced by millions of MSMEs is estimated to have Rs 10.7 lakh crore, amounting to 5.9 per cent of India’s gross value added (GVA), locked up annually, according to a report launched by the non-profit entity for promoting entrepreneurship Global Alliance for Mass Entrepreneurship (GAME) and analytics company Dun & Bradstreet (D&B) on Wednesday. “If India is to become a $5 trillion or even $10 trillion economy, it must ensure that its economic actors are reliable and trusted, and timely payments are made to MSMEs by buyers…At the moment, our economy seems a far way off from this reality,” the report said. GAME had shared the report with MSME minister Narayan Rane as well on Tuesday.
Mostly micro and small enterprises (MSEs) have been at the receiving end of the delayed payment crisis due to a power asymmetry between smaller suppliers and large buyers, according to the report. In particular, around 80 per cent of the annual delayed payments amount is owed to MSEs.
“In essence, the smaller you are as a business, the more you suffer at the hands of tardy buyers…By withholding payments (or trade payables) beyond the agreed credit periods, buyers essentially get access to free cash to finance their own working capital cycles, at the cost of their deprived (sellers),” the report noted.
If this happens repeatedly and across industries, then it indicates that delaying payments is being deployed widely as a ‘tactic’ by larger businesses to accumulate gains that should be distributed back to those who provide value to them, it added.
Particularly on the part of government departments and public sector units (PSUs), the report cited data suggesting high proportions of delinquencies by PSUs, indicating a long way to go for the latter to improve their payment performance. For instance, in 2020, 69 per cent of payments by public administration entities were delayed by 60 days beyond the due date.
To solve the crisis, the report suggested building a public conversation on the subject by publishing delayed payment data in the Economic Survey annually, leveraging platforms such as Mann Ki Baat, adding delayed payment as an indicator with the Ease of Doing Business Framework 2.0 etc. It also suggested allowing online dispute resolution companies to solve the problem and reducing the ‘burden on the state’.
More importantly, the report asked for setting up a ‘formula for delayed payments’ to impact the borrowing costs of buyers who don’t clear payments on time. “Banks can work with data providers to evaluate the delayed payables of large corporates, increasing borrowing costs of tardy buyers,” it said. Lastly, mandating miniratnas, maharatnas, and navratnas to transact on invoice discounting mechanism TReDS was also stressed to reprieve MSMEs from delayed payment crisis.