A slew of measures to ease the pain of payment delays faced by MSMEs

The 2019-20 Budget had proposed a new payment platform for India’s micro, small and medium enterprises (MSMEs) — defined as enterprises whose investments are under Rs 10 crore in the cases of manufacturing units and under Rs 5 crore in the case of service units — to enable filing of bills and online tracking of payments from government agencies, a major source of their cash flow. But to make the new platform effective, some problems with the existing online systems must be addressed.

The existing platforms (MSME Samadhaan and Trade Receivables Discounting System (TReDS)) for MSEs (micro and small enterprises) are riddled with problems that result in delayed payments.

Government payments to suppliers and contractors being a major source of cash flow for MSMEs, removing payment delays would enable MSMEs to make appropriate investment decisions, while improving their access to finance and marketing.

Attempts to streamline payments

All the 36 states/Union Territories in India have constituted Micro and Small Enterprise Facilitation Council (MSEFC) for the settlement of disputes on getting references/filling on delayed payments, as mandated under the the MSMEs Development Act 2006. The buyer is liable to pay a monthly compound interest to the supplier at three times the bank rate notified by the Reserve Bank of India (RBI) if the payment is not made within 45 days of the day of acceptance of the goods/service or the deemed day of acceptance.

All specified companies that delay payments are required to file a half-yearly return to the Ministry of Corporate Affairs (MCA) stating the details of the dues and giving reasons for the delay, as per an MSME ministry notification issued in November 2018. In January 2019, the MCA also directed all specified companies to file a form, MSME-I, containing the details of all micro or small enterprise suppliers.

But, as per the notification, these regulatory provisions do not apply to medium enterprises which constitute 0.01 per cent of the MSME category.

Small relief

To empower micro and small enterprises to directly register cases relating to delayed payments by government bodies, the MSME ministry launched a delayed payment portal, MSME Samadhaan, October 30, 2017.

As we mentioned earlier, medium enterprises are not eligible to submit applications at Samadhaan. And only MSEs having Udyog Aadhaar Number (UAN), a unique identity number obtained after registration for Udyog Aadhaar Memorandum (UAM), are eligible to apply at the portal.

The RBI also introduced an online platform, TReDS, in March 2014 to facilitate discounting of bills and invoices of MSME suppliers. This is a financial arrangement wherein a seller recovers an amount of the sales bill from a financial intermediary, after paying a discount/fee, before it is due.

Receivables Exchange of India Ltd (RXIL), the first TReDS platform, was incorporated on February 26, 2016. The ‘Strategy for New India @75’, prepared by NITI Aayog, clearly states that the Department of Public Enterprises should ensure the registration of all public sector units on TReDS portal.

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.

However, this is a somewhat lengthy process because it involves many stages and interactions between the three parties. Further, the discounting and financing charges are borne by the MSME suppliers, reducing their earnings. This discourages many MSMEs from using the TReDS portal and forces them to approach informal financers for invoice discounting that allows immediate payment.

Further, as per the November 2, 2018, notification by the MSMEs ministry, only companies registered under the Companies Act 2013 and reporting a turnover of over Rs 500 crore (and all Central Public Sector Enterprises), can board the TReDS platform. This ends up excluding many MSMEs.

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