Relevance: GS-3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development, and Employment.

Key Phrases: Micro, small and medium enterprises (MSME), Financial position, Delayed payments, TReDS, MSME SAMADHAAN, MSME Development Act, 2006, Interest of Delayed Payments (IDP) to Small Scale and Ancillary Industrial Undertakings Act, 1993.

Context:

• Over the past few years, the micro, small and medium enterprises (MSME) sector has been battered by a series of shocks.
• From demonetization to the transition to the goods and services tax to the pandemic, MSMEs have borne the brunt of the disruption in economic activities during each of these periods.

The financial position of MSMEs:

• While there are indications of this segment of the economy picking up, there are also signs that its financial position remains stretched.
• Data from the RBI’s most recent financial stability report showed that while gross non-performing assets of the MSME sector have dipped recently, they remained uncomfortably high.
• At the end of March 2022, bad loans in the MSME sector stood at 9.3 percent.
• Restructured MSME loans, constituting around 2.5 percent of total advances, remain a source of concern.
• During these periods of disruption, the larger firms have benefitted at the expense of MSMEs — as per CRISIL, more than a quarter of the country’s MSMEs have lost market share due to the pandemic.

Delayed payments:

• Delayed payments are a critical issue for the sector, especially for micro and small enterprises.
• 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.
• Among the MSMEs, for the smaller enterprises, delayed payments as a percentage of sales, have seen a sharp rise over the past few years.
• This problem is more acute in labour-intensive segments such as construction, retail trade, and transport.
• The government has been cognisant of this issue and has urged both central and state departments as well as public sector enterprises to clear their dues to MSMEs within 45 days of receipt of goods but the issue remains.
• Impact:
  • The sheer magnitude of the delayed payments, from both private and public sector customers, complicates their cash flow management, increasing their working capital requirements, and impacting their financial position and business prospects.

SOLUTIONS:

• Market solutions:
  • Market solutions such as working capital loans, trade credit insurance, and invoice discounting are used as mitigation measures to ensure sufficient liquidity for enterprises to run.
• 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 in the ecosystem where brand reputation affects business outcomes.
• Law and regulations:
  • laws can define the maximum number of days within which suppliers need to be paid after delivering goods and services and generally penalize 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.
• MSE fund:
  • To ensure that the continuum of working capital for micro and small units is uninterrupted, a permanent MSE fund may be created.
  • The corpus of this fund may be utilized to pay the entrepreneurs of MSE units after the passing of the order by the Micro and Small Enterprises Facilitation Council (MSEFC).
  • The unit originally liable to pay shall then deposit the entire due amount within a stipulated time into the fund.
  • The interest amount may be directly paid to the supplier unit.
  • Failure to deposit the amount in time would invite stringent legal action.

Mitigation measures for the poor financial conditions of MSMEs:

• Laws in place:
  • The Interest of Delayed Payments (IDP) to Small Scale and Ancillary Industrial Undertakings Act, 1993 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.
  • This was replaced by the MSME Development Act, 2006, which 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:
  • It is a platform introduced by the government for MSMEs to raise disputes over the non-payment of dues.
• TReDS:
  • To solve the delayed payment challenge for MSMEs, the Reserve Bank of India operationalized TReDS in 2017 where receivables of MSMEs were drawn against buyers (large corporates, PSUs, government departments, and others.) were financed through multiple financiers at competitive rates through an auction mechanism.
• Credit to MSMEs:
  • In recent times, there are signs of a turnaround as the bank credit to MSMEs has picked up pace sharply in the quarter ending March 2022.
  • Under the Atmanirbhar Bharat package, Emergency Credit Line Guarantee Scheme (ECLGS) was announced to help mitigate some of the distress caused to the MSME sector due to the sudden demand fall.
  • The main objective of ECLGS was to provide collateral-free additional funding of up to `3 lakh crore to MSME borrowers.
  • Under ECLGS loans worth Rs 3.32 lakh crore were sanctioned till April 2022.

Conclusion:

• Considering that MSMEs employ a sizable part of India’s labour force, and are also suppliers to the larger economy, their financial distress has far-reaching consequences. Appropriate steps should be taken to ease their woes.
• From the experiences of other countries, no single solution has been successful in dealing with delayed payments, but a combination of these solutions can address delayed payments and create an environment for MSMEs to flourish and grow.

Source: Indian Express

Mains Question:

Q. Delayed payment is a critical issue not only affecting MSME’s growth but disrupting the supply chains and denting the economy. Examine.