Micro, small and medium enterprises (MSMEs) are the backbone of the Indian economy, contributing as much as 45% of industrial production and 40% of country’s exports. With 63.3 million MSMEs in the country, they are the largest employers, next only to agriculture, which provides employment to 110.9 million people. MSMEs have long been facing a problem of delayed realisation of their bills and receivables, particularly from large corporate buyers and government organisations, leading to financial hardships and liquidity constraints—a key reason for many of them turning into non-performing assets (NPAs), affecting their sustainability.
With the introduction of the Insolvency and Bankruptcy Code and strict measures recommended by RBI for taking stringent action against NPA accounts, MSMEs face two-fold pressure: delayed payments of their bills and the looming threat of turning into an NPA (for defaults in honouring bank commitments). The Micro, Small and Medium Enterprises Development Act, 2006, made provisions to mitigate the problem of delayed payment, whereby any buyer who fails to make payment to MSMEs, as per agreed terms or a maximum of 45 days, would be liable to pay monthly compounded interest at three times the bank rate notified by RBI.
Further, in case of any dispute with regard to realisation of principal and interest, MSMEs could make a reference to the Micro and Small Enterprises Facilitation Council. Section 20 of the MSMED Act provided that these facilitation councils would be established by state governments and would conduct proceedings to resolve all referred cases within a period of 90 days from the date of receiving references. At the time of the enactment of the MSMED Act in 2006, it was felt that the aforementioned provisions would deter buyers of MSMEs’ products from committing payment defaults, but instead very few cases were brought to the facilitation centres as MSMEs feared losing out on business. The slow pace of resolution through this mechanism is visible (see table).
The ministry of MSME has launched a specialised portal for facilitating MSMEs to report cases of the delayed payment of bills to draw the attention of their buyers, the facilitation councils and the ministry of MSME. They file an online application, which would be reviewed by the facilitation councils, and is also visible to the concerned central ministries, state governments and central public sector enterprises (CPSEs) for proactive actions. This facility is gradually gaining popularity, proving to be an asset for the aggrieved MSMEs. The data in cases reported on the MSME Samadhan Portal can be seen in the accompanying table. Therefore, there is a need to devise alternative solutions to resolve this issue, as MSMEs are caught in a vicious cycle, where they avoid reporting their defaults to not lose out on a business relationship, despite being vulnerable.
RBI recently launched a scheme called the Trade Receivables Discounting System (TReDS) to facilitate the discounting of invoices and bills of exchange of MSME suppliers. The process of TReDS involves uploading of invoices and bills by MSMEs for discounting, which is achieved by converting them into factoring units, which then have to be accepted by corporate buyers before their discounting can take place by financiers, who will then receive their payments from the bank of the corporate buyer.
Limitation of TReDS
- It requires corporate buyers to accept the factoring units which underline an invoice or a bill of exchange before it can be discounted. Prior acceptance of bill for payment on due date was not granted by buyers in a majority of cases;
- The buyers’ bank may not agree to honour the payment obligation on due date by debiting the buyers account;
- Very few MSME suppliers could avail the facility of TReDS due to lengthy process involved;
- Eligibility criteria to set up and operate TReDS requires minimum of paid-up voting capital of `100 crore which would restrict entry of financiers into the system;
- TReDS does not address the problem of delayed payments by buyers to MSMEs with interest for delayed payments. Under TReDS, discounting and financing charges will have to be borne by MSME suppliers.
MSMEs supplying to various corporate and other buyers should be able to get their bills realised on due dates as per agreed terms. In cases of delays, buyers should bear interest for such delays, thereby transferring the burden of interest payment on the discounting of such bills for the period of delay to buyers.
RBI should permit setting up of NBFCs specifically for this purpose. This would enable MSME players with an e-platform to discount bills and finance their receivables, along with the provision to transfer interest liability on delayed payments to buyers.
The above alternative mechanism will help in the resolution of a two-pronged problem—that of realisation of their bills and receivables, and the issue of delayed payments faced by the MSME sector without disturbing the relationship between MSMEs and their buyers.
Director, External Affairs, Power2SME