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Payment Delays: Government’s Reformist Intervention In Curbing Imminent Peril & Fostering Growth In MSME Sector

A good governance approach, a positive political will and a concerted effort definitely shall act as a change agent and pave a way for a new emergent India.

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If Core Industries constitute the backbone of an economy, then the MSME’s are the muscle.

The curse of delayed payment is global epidemic; the culture of getting payments unasked for and on time isn’t widespread in the world, being especially unthinkable of in many countries like India. Payment hold, payment delays, inefficient processes, indifferent customers, corrupt practices etc. are the challenges a business has to face to fight for its survival. In the Indian customer context, there is a lack of respect for the concept of and the skills behind entrepreneurship and small businesses.

Delayed payments in Business to Business (B2B) and Government to Business (G2B) transactions have consequential effect on business, especially in context of the (ccc) cash conversion cycle. Very few take cognizance that the Accounts Receivables (AR) is essentially a loan to the customer, so the company loses out whenever customers delay payments, as typically any business will have some debt obligation in raising Working Capital and in paying timely interest. Late payment of commercial debt can play a significant role in the survival of firms as their liquidity can be severely affected. Payment delays can lead to abandoned projects, overrun costs, and completion delays ultimately leading  to bankruptcy or liquidation, cash-flow problems, poor quality of work, and negative credit rating  as well as PR impact.

As an example, if the payments are on time the same enterprise which executes 5 Projects in a year may be able to execute 10 or 15 such project during same period. Since deliveries will have faster pace, it will benefit the beneficiary and the public due to better tax collection at the Govt. exchequer. Therefore, it’s important to not view delayed payments as discrete company events, but as a concern to national image, global rating, and index of Ease of doing Business etc.

The future does look optimistic with the government protecting MSME’s by making stringent norms for ensuring timely and smooth flow of payment to Small and Medium Enterprises (SME). The government has shown its seriousness towards MSME through radical reformist direct initiatives like MSME SAMADHAAN – a Delayed Payment Monitoring System; and Micro and Small Enterprises Facilitation Council (MSEFC) portal.

Through a 2018 amendment to the Micro, Small and Medium Enterprises Development Act, 2006, (the “Act”), the Central Government has ensured that companies who get supplies of goods or services from micro/small enterprises and whose payments exceed 45 days from the date of acceptance or date of deemed acceptance of the goods and services shall have to submit a half yearly return to the Ministry of Corporate Affairs (“MCA”) stating the following: (a) The amount of payments, and (b) The reason of delay. The Act strengthens provisions relating to delayed payments to MSME by specifying a maximum credit period and higher penal interest if delayed beyond that period.

However, we must remember that the chances of corporates exposing themselves on delayed invoices would be negligible. Pragmatically, most of the Indian Corporate and Government department defaulters will try to justify delays by not accepting the invoices and putting them “under processing” tag. Many defaulters may also cite non-correspondence of goods and services provided with what was agreed to in the contract. Many businesses may also choose not to file for arbitration or litigation due to the highly detrimental impact it could have on their relationships with their clients. So, it is necessary for the government to rely on a statutory route, forcing all to comply, rather than replying on voluntary disclosure that may cause customer retaliation for reporting t in government interface.

A technical solution to this problem could be saving relevant customer information like PAN, UAN, CIN, GST Number in the MSME Portal while the vendors file GST returns. All the invoice(s) information relevant to that specific customer, will be visible to the customer itself while it logs in to the GST portal. Other activity will only be allowed after the customer accepts all invoiced raised by  various vendors. Information on accepted /unaccepted invoices will be auto-intimated or notified and be visible to the vendor to act upon it immediately. For the vendor, the GST portal will automatically ask on the 30th day for payment confirmation against each GST paid invoice and in cases of unpaid invoices, an “exception report” will be sent to the customer with a warning intimation. On the 46th Day, auto-mailers can be sent via a Govt. Portal to those deemed to be MSME payment defaulters with penal interest and other charges.

The government also must find ways to encourage organizations who pay their customers on time with  incentives like slab-based tax benefit structure or waivers. This solution could be achieved by information sharing between government interfaces like GST Portal, MSME SAMADHAAN /MSEFC portal and CIBIL (or Govt Rating Agency) Portal to come up with strong policy initiatives implementing incentives or penalties (boon or bane) program.

A disruptive innovation launched by the RBI named TReDS -- a digital platform where small businesses (MSMEs) can get access to capital by auctioning their trade receivables-- has also been adopted by the government to curb the perils of delayed payments and extend support to MSME’s. However, only a handful of companies are utilizing and reaping the benefits of this system indicating a need for a   comprehensive campaign to create mass awareness amongst the MSMEs.

A good governance approach, a positive political will and a concerted effort definitely shall act as a change agent and pave a way for a new emergent India.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Subhashis Mukherjee

The author is Managing Director at M2M Cybernetics Private

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