Indian MSMEs: Financial Horrors Are Alive And Kicking

Around 73,576 MSMEs registered on the Udyam portal have cancelled their registrations as of 29 March 2023 since its inception. This was stated in the Rajya Sabha recently by Bhanu Pratap Singh Verma, Minister of State, Ministry of Micro, Small and Medium Enterprises (MSME). 

As per the data shared by the minister, the reasons behind the withdrawal or cancellation were shutdown of businesses, change of owner, no further requirement, duplicity and a few others. 

Launched on 1 July 2020 by the Centre, Udyam Portal is an online system for registering MSMEs so they can use the benefits of schemes of the ministry and for priority sector lending from banks. Plus, it is also linked to the databases of the Central Board of Direct Taxes (CBDT) and Goods and Services Tax Network (GSTN). 

As per the data (Udyam registration) available on the ministry website, a total of 1,57,89,528 MSMEs have registered on the portal and 1,57,20,712 are classified. About 1,52,18,776 are micro, 4,60,858 are small and 41,078 are medium enterprises. 

Notably, as per the MSME Ministry, India has over 6.3 crore MSMEs which contribute approximately 30 per cent to the annual gross domestic product (GDP) and also employ an estimated 23 per cent of the country’s total workforce.

The industry employs around 94 lakh people [Udyam registered MSMEs], largely in the manufacturing and service sectors. However, challenges like lack of formalisation, insufficient access to capital, and obsolete equipment affect their growth. 

While talking to BW Businessworld about the withdrawal of Udyam registrations, Vinod Kumar, President, India SME Forum blamed the big corporations for this and added that they are crushing and pushing small enterprises to the brink. 

"The bread and butter of an enterprise lower in the hierarchy depend on the enterprise higher in the hierarchy. This dependence results in arm-twisting of the micro and small enterprises at the hand of the medium & large enterprises to the extent that micro and small enterprises are forced to deregister themselves from the UDYAM portal so that they are not considered as an MSME and the punitive provisions of the MSMED Act can’t be enforced against the large enterprises," said Kumar in a sharp tone. 

Thereby defeating the law as well as delayed payment solution providers like TReDS which only extend their remedies when you have a UDYAM Registration, Kumar added. 

Kanishk Maheshwari, Co-founder and Board Member, Primus Partners said, "One startling fact that came to the forefront was that a fraction of MSMEs (about 0.4 per cent of total registered units) are cancelling their Udyam registrations majorly due to the closure of units, change of ownership and lack of substantial benefits from the government. It’s important to take cognisance of these down-trend signs and come up with specific interventions to support the sector and allow it to thrive."

The data also showed that Maharashtra topped the list with the highest withdrawals- 17,574 licenses followed by Tamil Nadu (6,570), Uttar Pradesh (6,265), Gujarat (6,115) and Rajasthan (5,260 withdrawals). As per industry insiders, Maharashtra has big corporations which also exploit small enterprises and if SMEs refuse to meet their demands, big businesses threaten them to work with them. 

However, Madan Padaki, Co-founder, Global Alliance for Mass Entrepreneurship and  President, TiE Bangalore stated that their inquiries reveal that there have not been major cancellations of Udyam registration. He mentioned that the registrations are increasing over time. 

In the FY23 budget, the Modi government has allocated an approximate budget of Rs 22,140 crore for the MSME sector, which is a 42 per cent increase from previous years to provide financial assistance to businesses that are facing difficulties due to the pandemic.

"Many large companies have come forward to assist MSMEs by providing them with financial assistance, facilitating access to technology, and offering them opportunities to participate in supply chains," stated Padaki. 

The government's data also revealed that a total of 11,621 licenses were cancelled due to enterprises not needing them anymore while 19,520 licenses were cancelled because businesses were shut down. About 2,679 were withdrawn due to duplicity, about 8,484 were withdrawn because of a change of owner and 31,272 for other reasons.

Delayed payments: a cruel, cruel world— 

Among other challenges, delayed payment is a significant concern for this sector that limits their growth opportunities, an issue which needs immediate attention, experts believe. 

An estimated 5.9 per cent of the gross value added (GVA) in the Indian economy— Rs 10.7 lakh crore is locked up in delayed payments from buyers to Micro, Small and Medium Enterprise (MSME) suppliers, as per a report.

A report by Global Alliance for Mass Entrepreneurship (GAME) with Dun & Bradstreet and Omidyar Network India highlighted that payment delays to MSME suppliers have remained endemic and an intractable problem in India for more than 15 years.

The report stated, "The issue is not new or the result of the pandemic. The proportion of MSME sales stuck as delayed account receivables have been consistent and steady for years prior to the pandemic."

Although the economic lockdowns during this period did intensify the problem, the numbers in the preceding five years were no less alarming, it mentioned.

"The cash flow challenges that MSMEs face are compounded by the delay in payments by large enterprises. Considering how MSMEs operate on tight margins and with limited resources, delayed payments can cause a vicious cycle of debt for these businesses. In recent years, regulatory measures to recover the delayed payments have been intensified," said Nirav Choksi, CEO, Co-founder, CredAble. 

The budget 2023-24 also introduced a policy that allows buyers to claim for expense deduction only when they make payments to the suppliers. Additionally, the RBI’s new proposals for the Trade Receivables Discounting System (TReDS) aim at incentivising the MSMEs and tackling the prevalent issue of delayed payments by facilitating the financing of trade receivables. 

Along with introducing schemes such as the CGTMSE, the government together with players in the financial services industry need to leverage technology and key partnerships to service the ‘credit invisible’ MSMEs. 

Maheshwari said that although there is an MSME facilitation council to settle the payment dispute issues of MSMEs, some of the states have created a strong institution helping MSMEs benefit immensely, however, there are states that have not been able to implement this in the true sense. 

"So, there is a need to create a model framework by adopting the learnings of the states performing well and handhold other states in implementing the framework," mentioned Maheshwari. 

On delayed payments, Choksi stated that the situation is exacerbated owing to the lack of access to formal financing options for MSMEs. The challenge that most MSMEs face is a glaring credit demand-supply mismatch. Unlocking timely working capital is said to be at the core of all the solutions proposed to tackle delayed payments, he said. 

A pleasant future for MSMEs? 

Bearing the brunt of the slowdown brought on by the pandemic and the current global headwinds, many MSMEs continue to face closures. Compared to 2022, the total number of MSMEs that have shut down their operations in the current financial year has nearly doubled. 

The government can bring more MSMEs into the GST framework. This will discourage late payment practices and incentivise companies to pay on time. 

"Another effective strategy is to set up a payment portal where businesses can pay their bills and invoices easily and quickly. Fintechs will encourage them to come out with innovative products," said Padaki

During the Covid-19 pandemic, over a quarter of Indian MSMEs witnessed a contraction in their operating profits and ended up losing over 3 per cent of their market share to big corporations, according to the experts. 

"Strengthening the digital financial infrastructure and building innovative lending solutions will be crucial to driving small business growth and preventing the larger corporations from coming for a huge chunk of the MSME pie," added Choksi. 

For MSMEs, the deadly Covid-19 led to a decline in demand, labour shortage and supply disruptions and hence, in this post-pandemic environment they are desperately looking for handholding. Interestingly, in the current economic climate, big corporations and governments are well-positioned to help them sustain and recover which ultimately will result in the advancement of the economy.