The impact of delayed payments to MSMEs and lack of formal financing have adversely impacted the country's potential to create jobs, according to a report released on Thursday.
While struggling with payment delays, business owners are also pressured by non-representative and exclusive evaluation criteria limiting their access to loans, it said.
The Delayed Payments Report 2.0 titled 'Imagining Solutions to Unlock Working Capital for MSMEs' by Global Alliance for Mass Entrepreneurship (GAME) was released by the Chief Economic Advisor V Anantha Nageswaran.
Lack of awareness and thorough documentation are the major factors preventing Indian MSMEs from accessing the government financing schemes targeted at them. Also, the problem of delayed payments is exacerbated by the lack of credit, specifically working capital facilities, the report said.
As per the report, there can be plausible solutions with three central pillars -- Government and Policy Makers, Finance Enablers and Financiers, and Large Enterprises (including PSUs) -- for resolving Indian MSME's financial crisis as well as focus on creating an additional 10 crore jobs by 2030.
"With the support of these pillars, specific actions may be to undertaken to mitigate and/or eliminate the problem of delayed payments," it said.
These include strengthening cash flow-based lending through the provision of on-tap, easy-to-use, credit guarantees and proliferation of credit scores that use alternative data sources for new-to-credit customers.
Micro, Small and Medium Enterprises (MSME) contribute nearly 30 per cent to the country's annual Gross Domestic Product and are major employment generators.
"While there are over 200 government financing schemes targeted at MSMEs with outlays of several lakh crores (Mudra alone sanctioned Rs. 3.4 lakh crore in FY 2021-22), a combination of thorough documentation and a lack of awareness has meant that these schemes are unable to reach those most in need," the report said.
This is compounded by the reality that lakhs of businesses have never been part of the formal economy and, consequently, have never had access to credit, it said.
Nageswaran said that in the 2023-24 budget, the government has made it clear that payments to MSME suppliers cannot be claimed on an accrual basis and cannot be set off against taxable income unless the payment is actually made.
"That makes it clear that companies cannot have their cake and eat it too. Without a vibrant MSME sector, we cannot talk of India becoming a global economic power," he noted.
Ravi Venkatesan, Founder of Global Alliance for Mass Entrepreneurship (GAME), said that most MSMEs grapple with financial assistance, lack of mentoring support to scale the business, and technological obsolescence.