How Are Regulated Entities Addressing The Pressing Issue Of MSME Debt Collections

Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in India’s economy, driving employment generation, GDP growth, and overall economic development. The government has encouraged startups in various sectors, but Indian MSMEs still face significant challenges, including the persistent ‘Delayed Payments’ issue. 

This problem has been a longstanding concern, with approximately INR 10.7 Lakh Cr locked up in delayed payments from buyers to MSME suppliers, exacerbating the need for working capital. Around 27% of MSMEs receive more than half of their payments from buyers after three months, while 31% receive 30% to 50% of payments after 90 days. 

To achieve its ambitious economic goal of becoming a ten-trillion-dollar economy, India must ensure the reliability and trustworthiness of its economic actors by providing timely payments to MSMEs from buyers.  

Payment Defaults May Affect Supplier-Buyer Relationship

In a supplier-buyer relationship, invoice approval delays or rejections can occur for various reasons, such as defective goods or pricing discrepancies. Suppliers need timely information on the reason for the invoice rejection to correct any errors and resubmit it if necessary. 

However, suppliers often need to be more timely informed about the rejection, leading to delayed payments and unpredictable cash flow. Unclear reasons for refusal can cause frustration and wasted effort for suppliers trying to rectify the issue. 

Improved communication and transparency between buyers and suppliers are essential to ensure smoother invoice processing and timely payments.

Moreover, cash flow is king for small MSME suppliers, enabling them to fulfil their obligations and operate smoothly. However, receiving late payments from buyers, irrespective of the reason, can create significant challenges. 

It can disrupt their ability to restock inventory, hinder growth opportunities, and make it difficult to repay debts. These circumstances adversely impact their operational health and overall business stability.

Late Payments To Impact MSMEs Credit Score

Predictable receivables cycles can assist in the loan repayment obligation of the supplier, delays in loan repayment severely decline small businesses CIBIL score, giving them a “not-so-good” reputation for their payment behaviour. With an affected reputation, potential opportunities and prospects could steer away from the alliance.

The credit score, also called the CIBIL score, evaluates the creditworthiness of MSMEs based on their credit information report and provides a numerical score used by lenders to assess their financial standing. 

The credit information report (CIR) recaps the payment history of loans borrowed from various financial institutions and generates a credit history based on which the score value is calculated.

Additionally, the Ministry is actively implementing the Performance & Credit Rating Scheme to provide MSMEs with a trustworthy third-party assessment. This initiative aims to raise awareness among MSMEs regarding their operational strengths and weaknesses, enabling them to enhance their organisational capabilities and creditworthiness. 

By improving their credit profile, MSMEs can access credit at more favourable terms and lower interest rates. The National Small Industries Corporation (NSIC) has been appointed as the nodal agency to carry out the scheme on behalf of the government. 

The rating process is conducted through established rating agencies like CRISIL, CARE, ONICRA, SMERA, ICRA, and Brickwork India Ratings. 

By addressing late payments and their impact on credit scores, regulatory entities such as NBFCs and government bodies have formed an ecosystem to recover debts from retailers who are defaulting on their payments.

Regulatory Entities Take On Debt Recovery

Regulatory entities, including factoring NBFCs, possess the authority to report credit information to credit bureaus like CIBIL when small entities delay payments to MSME suppliers. 

Being reported as a defaulter can have significant repercussions on the entity’s creditworthiness, leading to potential difficulties in accessing credit from banks and other financial institutions, which can be highly discouraging for these small businesses.

 To illustrate, let’s consider ‘XYZ’ Company is a supplier that distributes its products to 10,000 retailers. Unfortunately, some retailers have consistently defaulted on their payments to XYZ Company. 

In this situation, factoring NBFCs may have the option to report these defaulting retailers to credit bureaus without individually onboarding each retailer. Instead, they can consolidate the information about these defaulters under a single document, associating it with ‘XYZ’ Company’s credit profile.

On the other hand, the Indian government has implemented the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED) to assist MSMEs in recovering payment dues from private companies, PSUs, and individual company owners. 

This Act offers several measures to take action against buyers who fail to make payments within 45 days. According to Section 16 of the MSME Act, the Supplier is entitled to pay interest three times the bank rate notified by RBI in case of delayed payment. 

This legislative framework aims to provide MSMEs with a means to prompt and secure payment recoveries, bolstering their financial stability and growth prospects.

To Encapsulate

Account receivables constitute a significant proportion of the working capital. Hence, enterprises require a robust collection process that determines and manages the optimum level of credit and enforces formal credit obligations.

Delayed payments pose a significant challenge for most business entities, with only a few companies ensuring timely payments to vendors creating financial problems for MSMEs. In some cases, unpaid dues become legally claimable, requiring businesses to seek recovery through lengthy and costly litigation procedures. 

As a result, many entities turn to lawyers for assistance in the recovery process, further complicating the situation. India’s legal procedures for recovering money can be challenging and costly, making timely payment a critical aspect for the smooth functioning of businesses. 

However, regulated entities can help MSMEs to overcome these challenges by implementing an effective collection process. That includes: determining and managing the optimum level of credit, which helps strike a balance between providing credit to loyal and reliable customers 

However, if corporations can create a Realtime seamless information flow of Invoice confirmation within their respective ecosystem, this shall have a tsunami effect of availability of credit to the supplier from Bank & Factoring NBFCs while minimising the risk of delayed payments and enforcing formal credit obligations that outline payment terms, due dates, and consequences for late payments. By formalising credit obligations, suppliers can hold retailers accountable for timely payments.