MSMEs | Delayed payments continue to clog liquidity. TReDS could be the answer

The COVID-19 second wave has hit India hard, destroying lives and livelihoods. In these stressed times, the Reserve Bank of India (RBI) Governor made an unscheduled address on May 5, announcing relief measures for MSMEs. While the RBI and the government have been proactive in extending several support schemes, it is important to focus on the unresolved, underlying issues that have led to financial stress even in normal times, particularly for micro and small businesses.

The Expert Committee on Micro, Small and Medium Enterprises, headed by UK Sinha, in 2019 examined several such fundamental issues, one of which was of delayed payments, referred to in the report as a “perennial problem”.

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What lies at the core of this problem is the asymmetry in bargaining power and it hits the smaller businesses much harder. A recent report by the Global Alliance for Mass Entrepreneurship (GAME) and Krea University, ‘Unlocking Credit for India’s Job Creators’, used data from the Centre for Monitoring Indian Economy (CMIE)’s PROWESS database to estimate that the average payment period for the MSMEs ranges between three months and six months, the smaller the firms the higher the delay — 77 percent of micro, 69 percent of small and 65 percent of medium enterprises had their payments delayed beyond 45 days.

The solutions mooted so far unfortunately haven’t scaled up. Take the MSME Development Act 2006 — intended to protect the interests of the MSMEs — that specifies that the recipient of any goods or services pays the MSME supplier within 45 days. To implement this clause, state governments are expected to ensure that the MSEFCs (MSME Facilitation Council) are formed, that they hold meetings regularly, and decide on the delayed payment cases within a three-month window. While this is laudable on paper, it has left a lot to be desired in terms of execution on the ground.

The MSME Samadhan portal was launched in October 2017 for the MSMEs to file applications against suppliers; just about 9 percent of applications filed since 2017 have been settled, and around 25 percent have been converted into cases by the MSEFC; the rest are either rejected or still under consideration.

Given the series of major and minor lockdowns in the recent past, the stress is building up. Currently 37 percent of the 76,667 applications, filed on the Samadhan portal since 2017, are in the category of ‘being received in the last 15 days’ and which are still to come upon the table of the MSEFCs — this is a very high share.

We also have to keep in mind the fact that even assuming that a single MSME has registered each case on the portal, the 76,667 cases so far are a minuscule percentage of the 68.3 million MSMEs operating in India. The solution hasn’t certainly scaled up to demonstrate the desired national impact. Clearly, the challenge of ‘asymmetry in bargaining power’ is still not being effectively addressed. The problem of ‘delayed payments’ is still looking for a market-based and scalable solution.

Further, while most applications at the MSECF are unresolved, those that do take weeks. It takes a minimum of two weeks even to start the hearing on applications. However, there is one solution set up by the RBI that resolves cases on merit almost within a week — TReDS (Trade Receivables Discounting System), an online platform for invoice discounting. One of their three platforms, RXIL, has had transactions worth Rs 69 crore in April 2020, and touched a high of Rs 1,105 crore in March 2021, showing the increasing use of this facility.

Looking ahead, the TReDs platform has great potential as it ensures the re-encashment of receivables within a week at an affordable 5-8 percent annualised interest cost, eliminating the credit risk by shifting the liability from the MSME to the intermediary financial institution.

However, there is considerable scope to scale up on the TReDs platform too. Some suggestions are:

1. Enforcement of the existing rules can help make a significant difference e.g., compliance of registration on the TReDs platform should be strengthened. While all corporates with a turnover of Rs 500-plus crore and all Central Public Sector Enterprises are mandated to register on the TReDs platform, just about 20 percent have done so.
2. In order to onboard more companies, the turnover limit should be reduced from the existing Rs 500 crore to Rs 250 crore.
3. As less than 1 percent of all MSMEs are registered on the platform, which means more awareness needs to be created.