Resolving late payments to MSMEs – the New Indian Express


With more than 30% contribution to the total gross value added, a one-third stake in the total gross production value of the country and a workforce of over 11 crore of people, nothing on the micro sector, small and medium Indian economy does not seem micro, small or medium.

The 73rd round of NSSO found 633.88 lakh of unincorporated non-agricultural MSMEs in India engaged in different economic activities. However, the total number of MSME registrations under the government-notified Udyog Aadhaar (UAM) memorandum was only 1.02 crore. The UAM was replaced on July 1, 2020 by the Udyam Registration, more simplified and free. Until March 31, 2021, only 26.42 lakh MSMEs had registered on the Udyam registration portal. As a result, the majority of MSMEs still remain outside the jurisdiction of the organized sector and the scope of the myriad of central and state government programs intended to support them.

One of the most serious problems facing MSEs (Micro & Small Enterprises) is that of late payments for goods supplied and services rendered. This often leaves them in debt, ultimately pushing them to the brink of insolvency. To deal with this, the 2006 Law on the Development of Micro, Small and Medium Enterprises (MSMED) contains provisions for the creation of a Council for the Facilitation of Micro and Small Enterprises (MSEFC) for the settlement of these disputes in state level. The Ministry of Micro, Small and Medium Enterprises has also launched a deferred payment portal – MPME Samadhaan – allowing micro and small entrepreneurs to directly register their late payment cases. After 15 days of registering their file on the portal and submitted to the MSEFC for examination, the file is transferred to the Council.

TReDS is an electronic platform to facilitate the financing of MSME trade receivables owed by businesses and government departments / PSUs through financiers such as banks or other financial institutions. However, multi-stakeholder interactions and steps make it difficult for entrepreneurs. Increasing the number of stakeholders and reducing transaction discount fees would increase the efficiency of TReDS, further incentivizing MSMEs to use this platform.
Despite the legal remedies available, this unease continues to weigh on the growth of the MSME sector. Payments to MEPs remain deferred, either due to procedural delay (as of June 21, 30,483 applications out of a total of 79,747 applications submitted to the MSEFC have not yet been examined by the Council), non-compliance with decrees or lack of financial means with the purchasing unit itself. Whatever the case, the victim is the MSE unit. Working capital is the lifeblood of MSMEs and late payments are drying them up. Micro and small businesses remain more vulnerable to liquidity issues and the post-Covid demand crash has only fueled the fire.

To ensure that the continuum of working capital for micro and small units is uninterrupted, a permanent MPE fund can be created. The corpus of this fund may be used to remunerate entrepreneurs for MSE shares after an order has been placed by MSEFC. The initially liable unit then pays the full amount due within a time limit to the fund. The interest amount can be paid directly to the supplier unit. Failure to pay the amount on time would result in severe legal action.
Such a fund can be established at the state level by the Center in partnership with state governments. Since maintaining any fund requires expertise and diligence, a financial institution may be mandated for this purpose. The fund can be managed by any such institution selected through a formal selection process.

As of June 1, 2021, out of 32,420 cases actually filed with the MSEFC for an amount of 11,816 crore rupees, only 10,739 cases for a total amount of 2,466 crore rupees have been settled. What a boost it would be for the cash-strapped MSME sector if there was a rapid phase-out and disbursement of the amount in these outstanding cases from the suggested fund. There is also a concurrent need for more MSEFCs at the state level for this to materialize.

Given the huge financial crisis, it will be a Herculean task for the government to dive into its coffers for more resources. However, a simple reallocation of resources can come to the rescue. As part of the Atmanirbhar Bharat package, an Emergency Credit Line Guarantee Program (ECLGS) was announced to help alleviate some of the distress caused to the MSME sector due to the sudden drop in demand. The main objective of ECGLS was to provide additional unsecured financing of up to 3 lakh crore to MSME borrowers. The amount of emergency credit line funding guaranteed to eligible MSME borrowers was to be 20% of their total outstanding credit up to 25 crore as of February 29, 2020.

The program has been expanded to include more sectors and companies with greater credit exposure through subsequent revisions in the form of ECGLS 2.0, 3.0 and more recently 4.0. The deadline for submitting applications has also been revised accordingly to September 30, 2021. Recently, funding under ECGLS was increased to 4.5 lakh crore. However, what should be noted is that the Indian economy has been struggling with a slowdown since 2018, so many companies were already struggling to stay afloat and had become SMA2 or NPA by February 2021, which made them ineligible for ECGLS. Second, a significant portion of MSMEs are based in rural areas with poor access to formal credit and, therefore, operate through informal credit channels or depend on their own working capital. ECGLS excludes these MSMEs. This may be the reason why the amount designated under the program could not be disbursed and its scope and validity had to be extended.

Some ECGLS financial assistance can be used as a first step to settle MSEFC claims, thus providing the initial support for such a fund. Recurring funding will not be necessary since all units likely to pay would be required to repay. Establishing such a fund will build confidence in the MSEFC and encourage more entrepreneurs to register, thereby increasing formalization and addressing the chronic problem of deferred payments through a long-awaited elixir for the MSME sector of our economy. .

Nitisha Mann
Indian Economic Service Officer and Deputy Director, MPME-DI, Cuttack
(Opinions expressed are personal)



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