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Policy and behavioural changes can fill the MSME financing gap

Much can be done on several fronts to relieve small businesses of their problem of payment delays

The world over, micro, small and medium (MSME) enterprises are the backbone of a healthily balanced economy. They supply an innumerable number of components, intermediate goods and services at competitive prices to large original equipment manufacturers and industry majors. Yet, delayed payments for their goods and services result in large portions of working capital being blocked, which, coupled with often-inadequate credit at reasonable cost, leaves many financially unviable and unable to plan for growth. The second wave of covid and its associated lockdowns have again aggravated their situation. The government has announced emergency credit support measures and temporarily relaxed several compliance requirements. But, this may also be a good time to fundamentally alter the availability of funds for MSMEs and their access to the same.

The government has been trying to address the issue for the past few decades. In the early 90s, Small Industries Development Bank of India (SIDBI) evolved a receivable finance scheme to obviate delayed payment situations. The 1993 Interest on Delayed Payments to Small Scale and Ancillary Undertakings scheme sought to mitigate the burden of small enterprises by defining day of acceptance, deemed acceptance, and specifying the payment of interest. The MSME Development Act of 2006 proposed guidelines for resolving the problem of delayed payments. Further, the Factoring Regulation Act, 2011, helped codify the factoring business to address payment delays.

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As per a recent report, Unlocking Credit for India’s Job Creators, brought out by the Global Alliance of Mass entrepreneurship (GAME), the total outstanding payments to be made by buyers to registered MSMEs in India could be about ?15 trillion. The average payment period ranges between three and six months and is inversely proportional to the size of the enterprise.

The trade receivables discounting system (TReDS) initiated by the Reserve Bank of India (RBI) is a unified platform for sellers, buyers and financiers to facilitate the financing of trade receivables of MSMEs from corporate and other buyers, including government departments and public sector undertakings (PSUs). TReDS provides easy access to funds at market-discovered rates of interest. The MSME ministry has mandated the registry on the platform of companies with over ?500 crore in turnover. However, some purchasers could be wary of transacting on TReDS as they could lose the flexibility of deferring payments to MSME suppliers. Hence, an option to defer the retirement of an accepted invoice on TreDS up to a maximum of 180 days by paying additional interest of, say 2%, above the contracted rate of interest, may need to be provided.

In January 2018, the Economic Survey noted that the goods and services tax (GST) offered exciting possibilities for not just ushering in a single market, but also for other efficiency gains. In keeping with that spirit, and with a view to generate higher volumes of invoices that can be financed and thus expand the factoring business manifold, a standing committee on finance headed by Jayant Sinha has recommended integrating the TReDS platform with the GST network’s e-invoicing portal. This would grant buyers and sellers access to e-invoices through a single window for factoring and also enhance competition and liquidity, reducing the price of factoring. This could also facilitate the seamless movement of invoices to a second window of TReDS for invoices drawn on non-registered buyers to be discounted. The integration and creation of a second window could be facilitated by the MSME ministry and RBI.

Apart from generating higher volumes of invoices, it would also be desirable to have more financers on these platforms. Non-banking financial companies (NBFCs), with their domain expertise in certain sectors and advanced analytical techniques, have a greater risk appetite for financing invoices hosted by lower-rated firms. To qualify as a ‘factor’ for registration by RBI, an NBFC needs to have 50% of its total assets/income from the factoring business. This has been a limitation. Amendments to the Factoring Act promised in the 2020-21 budget, allowing more NBFCs to join the TReDS, are still awaited.

A committee headed by U.K. Sinha had recommended that a credit enhancement mechanism for extending guarantees/comforts with respect to invoices accepted by smaller/lower-rated corporates be evolved. This could be facilitated by the National Credit Guarantee Trust Corporation and the department of financial services.

Private sector initiatives, like the Open Credit Enablement Network and iStack, have been devised to bridge the MSME finance gap. The gap’s persistence, however, suggests that the problem is as behavioural as it is related to policy or technology. Industry associations and chambers of commerce must get their members to embrace a culture of payments to MSMEs on time. Corporate business responsibility precedes and is more impactful than corporate social responsibility. ‘Matsya nyaya’, or big fish eating small fish, is not an enduring foundation for a prosperous India.