MSMEs

Context: Delayed payments for small firms stifle economic growth

Delayed Payments

• Delayed payments to suppliers who are often MSMEs is a norm set by buyers who are often big companies and public sector units.
• One estimates suggest that payments worth Rs 6.3-10.7 lakh crore were delayed to MSMEs during 2020-21 with the average days for the delays for micro, small and medium enterprises estimated to be 194, 68 and 46 days respectively.

Foregoing business opportunities due to lack of liquidity

• For every day that a payment is delayed, there is an erosion of value. It locks in capital that could have been deployed gainfully.
• The fact that this is a problem largely faced by cash-strapped and credit-starved MSMEs, makes the erosion of value even more acute.
• Micro and small enterprises borrow at comparatively higher costs and often operate in very competitive environments, surviving on razor-thin margins.
• Foregoing business opportunities due to lack of liquidity is not just detrimental to the specific firm or enterprise but is a deterrent to the overall growth of MSMEs.

Other types of costs incurred

• The other types of costs incurred by such supplier firms include the time spent and the personnel costs employed to recover payments as well as the business forgone due to disrupted cash flows.

The issue needs to be addressed at multiple levels.

Intervention from the government

• This kind of intervention should aim at changing the business culture and thereby strengthening all enterprises across the supply chain.
• On this front, the MSME 2006 Act and the SAMADHAN platform are both steps in the right direction, but there are gaps.
• There are close to one lakh complaints at present on the portal, amounting to Rs 25,000 crore.
• But the disposal rate is low, suggesting that the mechanism is not backed by the necessary wherewithal to address the issues.
• Also regulatory interventions are needed to shift the onus of timely payments onto the buyer firms.
• On the supply chain financing and in-time credit – Market-based solutions lead to efficiency gains and maintain amicable supplier-buyer relations while easing cash flows for MSMEs.
• Strengthening associations and credit practices of MSMEs – entrepreneurs learn to develop a unique value proposition for their services over time, to quicken this, MSMEs need to coalesce and work towards gaining sustainable credit terms.

The problem of delayed payments is a systematic one. It gives buyers an advantage that the economy cannot afford. On the other hand, small businesses and supplier firms have to work with a rising cost of capital due to delays and uncertainty in terms of planning business cycles.

If this issue is not addressed now, it will only add to the burden on the MSMEs, working against the smaller supplier firms and crippling economic activity for the vast majority of entrepreneurs in the country.

Source: Indian Express