The typical payment cycle of MSMEs ranges from 90 to 120 days.
Micro, small and medium enterprises are a key part of the Indian economy. Not only do they account for a significant share of the country’s manufacturing output and exports, they also employ a sizable section of the labour force. However, among the considerable hardships they face, the lack of access to credit and the issue of delayed payments are particularly serious. Micro and small enterprises, as several studies have shown, account for a majority of the annual delayed payments. Over the years, the government has taken steps to make matters easy for these enterprises. For instance, it launched the Samadhaan portal to monitor the outstanding dues to these enterprises. In the Union budget 2023-24, the government also introduced a provision to ensure timely payments to MSMEs. The typical payment cycle of MSMEs ranges from 90 to 120 days. This large window tends to create mismatches between an entity’s cash inflows and outflows, thereby increasing its working capital requirements. The new provision tried to address this issue by aiming to secure payments to MSMEs within 45 days of the supply of goods and/or services. This was a well-intentioned move. However, it has ended up having unintended consequences.
According to a report in this newspaper, larger companies are trying to circumvent this provision by cancelling orders to registered MSMEs as they prefer the longer payment cycles. In fact, they are now placing orders with unregistered MSMEs, who they would rather prefer to deal with as it gives them greater flexibility in operations. The new provision “allowed for deduction for larger companies” against payments to these enterprises “only after they are paid”. Not being permitted to “make deductions in their tax returns” would only increase their tax liability. There are also reports of the bigger companies trying to “force suppliers to cancel their MSME registration”. After all, the larger companies exercise considerable negotiating heft against their MSME suppliers. This asymmetry in relations has also resulted in a worrying development: MSMEs are choosing to deregister in order to make sure that they do not lose their orders. At the end of last year, the total number of MSMEs registered on the Udyam registration portal stood at 3.16 crore. This includes informal micro-enterprises registered on the Udyam Assist Platform, which according to more recent data stands at 1.5 crore.
The government has initiated conversations with stakeholders for possible solutions to straighten out issues. It has also sought suggestions on ways to ensure “timely clearance of MSME bills”. Delayed payments have hobbled the working of these enterprises for long. They also have difficulty accessing low-cost credit. Appropriate steps must, therefore be taken to resolve the issue related to the window of payments at the earliest.
