What is needed is a resolve to solve the malaise and adopt the digital supply chain finance system which has been thriving since the Covid disruption.
Late payment and even non-payment of dues to the MSME sector are rampant. This increased manifold when the Covid pandemic hit the country’s economy. To address the issue, the government enacted several laws and started ‘Samadhan’ portal to monitor delayed payments to MSMEs. What the Samadhan portal has revealed is the huge sum that remains unpaid to MSMEs that approached the portal for redressal.
There are 98,666 applications filed by MSMEs to the portal. Out of these, a mere 11,057 cases have been disposed of and 30,074 applications have yet to be viewed. Evidently, Samadhan is not much help to the cash-strapped MSMEs which suffer from cash flow worries even under normal circumstances.
The Samadhan portal shows that the central and state government departments and owned units are no less responsible for the cash flow plight of MSMEs than others.
On the latest count, there are 18203 applications filed against government units and departments. Out of these, the government bodies have not responded to 14,739 applications.
As much as Rs 8949.68 crore worth of potential cash flow of MSMEs are locked with the government-owned enterprises only. Curiously, the Union Government is helpless in ensuring timely payment of dues to MSMEs.
In response to a question in the Lok Sabha in February 2021 the government said, “While the government can urge buyers to pay MSMEs on time, it cannot force them to do so. The Ministry has taken up the subject vigorously with the Central Ministries, Central Public Sector Enterprises (CPSEs) and State Governments and the corporate entities. But, it is to be noted that the Central Government cannot issue any directions to, or force, State Governments or State PSEs to pay the dues.”
OVER RS 25,550 CRORE OF MSME CASH FLOW IS STUCK
Economists, while analysing the macroeconomic variables impacting growth, usually leave out a critical microeconomic factor, cash flow, which is the lifeline of the productive sector.
This is most critical in the case of MSMEs sector since these units operate on a limited cash liquidity. For small business owners, cash flow problems are a common and dangerous threat, as seen that even in the USA, small businesses and start-ups fail 82 per cent of the time due to a low cash flow.
In India the problem is even more acute. As per the Samadhan portal more than Rs 25,550 crore of MSME cash flow is stuck in non-payment or delayed payment of dues.
It is estimated by one of the reputed companies in trade credit insurances suggested that over 80 per cent of businesses that are shutting down are due to cash flow problems. Overall, the network effect is so huge that it creates unrest among a significant number of institutions in the MSME sector.
India has approximately 6.3 crore MSMEs. Registered micro-enterprises stood at 5,441,220 (94.34 per cent), followed by small enterprises at 293,555 (5.09 per cent) and midsized enterprises at 32,959 (0.57 per cent).
The Indian MSMEs sector contributes about 29 per cent towards the gross domestic product (GDP) through its national and international trade. The issue of cash flow in the sector, therefore, affects 29 per cent of India’s GDP.
While there is no dearth of opinions on the need to see improvement in the access to finance for MSMEs, the MSME Development (MSMED) Act of 2006 proved inadequate in addressing the issue. The MSMED Act, 2006, provides that buyers should make payments to MSMEs within 45 days.
The Act stipulates that payment for the supply made by an MSME should be mandatorily cleared by the buyer within the outer limit of 45 days from the date of acceptance or deemed acceptance of the supply unless agreed otherwise by the parties.
Payment delays attract compound interest monthly and rests on the defaulter at three times the bank rate notified by the Reserve Bank of India. But several loopholes in the system ultimately favour the defaulters to get away without making the payments.
Often enough, the buyer fails to attend the hearings before MSEFC (Micro and Small Enterprise Facilitation Council) for settlement of disputes and keep pushing the case for years because there is simply no penalty for doing that.
Even when the arbitration goes in the favour of an MSME to collect the dues, the business is forced to approach a local civil court to collect its dues.
SUPPLY CHAIN FINANCE
Supply chain finance or reverse factoring, however, proved beneficial. Unlike traditional factoring where a supplier wants to finance its receivables, supply chain financing is initiated by the ordering party (i.e. the customer) in order to help its suppliers to finance its receivables more easily and at a lower interest rate than what would normally be offered.
RBI had steered the launch of the Trade Receivables Exchange system, wherein small businesses can get invoices accepted by their buyers discounted and receive payments from financial institutions that will collect the receivables on their due dates.
On its part, the government made it mandatory for companies with a turnover of Rs 500 crore or more to get registered on the TReDS platform. The Government’s e-Marketplace (GeM) is automatically linked to TReDS.
That is, invoices raised for procurements made by the government through the GeM can be easily discounted on TReDS platforms and payments collected by small suppliers.
However, many big government procurers lie outside TReDS coverage as could be seen in the outstanding dues reflected in the Samadhan portal.
MSME SUPPLIERS, CORPORATE BUYERS, FINANCIERS
This system involves three parties — MSME suppliers, corporate buyers and financiers.
The financier discounts the invoice after the corporate buyer accepts the invoice and bills uploaded by the MSME supplier.
In order to expand the number of financiers the government amended he Factoring Regulation (Amendment) Bill, 2021. This will expand credit facilities for small businesses, and will help them in accessing funds from 9,500 non-banking financial companies (NBFC).
The reverse factoring method is an effective cash flow optimization tool for companies outsourcing a large volume of services. An example could be clinical research activities by Pharmaceutical companies. The benefit to both parties is that the company providing the services can get the outstanding value of their invoices paid immediately while the ordering party can delay the actual payment of the invoices to its financing bank thus increasing its cash flow.
Experience of the state of Goa proved the benefit of the reverse factoring TReDS system when it got itself on-boarded on TReDS platform. MSME sellers in Goa received the cash flows they needed on time, while the government, as the buyer, was able to make payments on favourable terms and avail the support of financiers, including banks, to ensure timely payments to MSMEs in need.
Reportedly, over Rs 575 crore of MSME funds have been cleared via the TReDS platform, helping over 250 MSMEs in the state. Should all other states and central departments and state enterprises adopt the Goa example the late payment realisation ailment faced by MSME sector can be effectively addressed.
What is needed is a resolve to solve the malaise and adopt the digital supply chain finance system which has been thriving since the Covid disruption. Supply chain finance or reverse factoring is a solution for cash-strapped MSMEs. Policies are in place, adoption is the issue.
(The writer is Sundeep Mohindru, CEO of M1xchange)