Relevance: GS-3: Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment.

Key Phrases: MSMEs, Delayed payments, mitigation strategies, Prompt Payment Act, Interest of Delayed Payments (IDP) to Small Scale and Ancillary Industrial Undertakings Act, 1993, MSME Development Act, 2006, MSME Samadhaan, Trade Receivables Discount System.

Why in News?

• Small business owners/ Micro, Small, and Medium Enterprises (MSMEs) are facing delays in payments from big companies and public sector units. For every day that a payment is delayed for credit-starved MSMEs, there is an erosion of value. If this issue is not addressed on priority, it will only add to the burden on these firms.

Context:

• Delayed payments are a critical issue not only affecting MSMEs growth but disrupting the supply chains and denting the economy, but it's not unique to India.
• Most enterprises around the world conduct business by offering credit to their buyers, and consequently face problems with receiving their payments on time.
• According to an estimates approximately Rs 10.7 lakh crore is stuck as delayed payments to MSMEs in India, amounting to 6% of India’s GVA (Gross Value Added) for FY 2020-21.

Law and regulations in World:

• Most of Europe, the US, Japan and India have laws to check Delayed Payments and encourage prompt payments.
  • In the US, the Prompt Payment Act is limited to government contractors only.
  • EU's Late Payment Directive covers all commercial transactions.
  • Japan protects subcontractors that supply to both corporations and the government.
  • In India it is applicable to all micro and small enterprises.
• These laws typically define the maximum number of days within which suppliers need to be paid after delivering goods and services and generally penalise delays.
• By doing so, these laws are intended to ensure sufficient liquidity to small businesses, and provide compensation and legal recourse to enterprises if their payments get delayed.

Mitigation of delayed payments in India:

India has a history of having legal and regulatory safeguards to protect MSMEs from delayed payments.

• The Interest of Delayed Payments (IDP) to Small Scale and Ancillary Industrial Undertakings Act, 1993:
  • It was the first legal measure to ensure timely payments by mandating buyers to pay interest to MSME if payments were due for more than 30 days.
• MSME Development Act, 2006:
  • Interest of Delayed Payments (IDP) Act, 1993 was replaced by the MSME Development Act, 2006.
  • It was similar to the IDP Act, 1993 apart from changes to the interest rates and the number of days in which payments should be made.
  • The threshold for making payments was increased to 45 days.
• MSME Samadhaan -MSME Delayed Payment Portal:
  • Samadhaan is a platform introduced by the government for MSMEs to raise disputes over the non-payment of dues.
  • The platform currently has complaints raised by 1.08 lakh applications filed by Micro & Small Enterprises (MSEs) with delayed amounts totalling to Rs 28,085 crore since its launch in October 2017.
• Trade Receivables Discount System (TReDS):
  • India has a history of market solutions to ease the burden of delayed payments such as Trade Receivables Discount System (TReDS) and SIDBI-NSE Trade Receivable E-discounting Engine (NTREES), which MSMEs could use to securitize their receivables, thus easing the working capital crunch due to delayed payments.
  • TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers.
  • These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).

Issues with Law and Regulation:

• The laws have limited success in curbing the problem because of weak enforceability.
• The legal process is lengthy and costly besides straining the buyer-supplier relationship which is detrimental to repeat business. Many MSMEs do not even file a case because the bargaining power is so poor, they just fear that they will get caught in the system and lose a buyer.
• Delay payment case is a civil case. It may then take up to 10 years to recover the dues because the civil court is also very slow
• Solutions such as working capital loans and trade credit insurance have seen limited uptake due to the low penetration of formal finance in the MSME sector

Solution for delay payments of MSMEs:

• Market solutions:
  • Market solutions such as working capital loans, trade credit insurance, and invoice discounting are used as a mitigation measure to ensure sufficient liquidity for enterprises to run.
  • Market solutions are most prevalent in countries such as Taiwan and South Korea.
    • Taiwan has the best adherence to payment terms among all major economies. It also has the lengthiest payment terms offered by the suppliers. The presence of these solutions enables enterprises to offer longer payment terms and reduce the impact of defaults.
    • Taiwan and South Korea have the highest financial coverage of SMEs among all major economies, with the majority of the total borrowings extended by formal financial institutions are to SMEs.
• Moral appeal:
  • Appeals to larger buyers to honour their obligation to pay on time are routinely made by governments, trade associations, and political leaders. While they are not legally binding, they potentially create persuasive pressure on defaulters.
  • Like the Prompt Payments Code (PPC) of the UK that is in use since 2008 so as to ensure a good payment culture in the country, businesses can commit to code, through which they agree to pay their suppliers on time, provide guidance to suppliers on payment procedure and encourage other actors in their supply chain to commit to good payment practices.

Way forward:

• From the experiences of other countries, no single solution has been successful in dealing with delayed payments to Small business owners/ MSMEs, but a combination of these solutions can address delayed payments and create an environment for MSMEs to flourish and grow. Further, the government should bring regulatory interventions like shifting the onus of timely payments onto the buyer firms. It should issue statements that such delays are not in the nation’s interest.

Source: Indian Express

Mains Question:

Q. Discuss the issues related to delayed payments of MSMEs in India and suggest measures to tackle the problem. (250 words).