The MSME sector needs help. First, smoothen financial flows

According to the 2020-21 annual report of the ministry of micro, small and medium enterprises, India’s 63 million micro, small and medium enterprises (MSMEs) contributed to 30% of the GDP. MSMEs also employ more than 100 million workers. These numbers underline the importance of MSMEs in generating jobs — especially when the pandemic has affected the sector significantly.

One of the challenges facing MSMEs in India is related to finance. CRISIL’s small and medium enterprises (SME) tracker shows that the problem has been getting worse, given the fact that the gap between the available and required working capital has been widening since 2015.

The sector’s finance-related problems are due to three main factors — the absence of viable credit providers, absence of credit products and schemes such as micro-insurance that help enterprises tide over episodic downturns, and delayed payments leading to a persistent crunch in working capital. The research undertaken by the finance taskforce at the Global Alliance for Mass Entrepreneurship has looked at the problems of delayed payments.

To measure the extent of the problem, we used the Prowess IQ database which includes over 51,000 companies and is the largest available dynamic corporate sector database in India. We categorised enterprises following the existing definitions of annual revenue of less than ₹5, 50 and 250 crore, respectively. About 12,000 companies met the criteria of having reported their annual revenue and sales.

The MSME Act of 2006 mandates that payments be completed in 45 days. Our calculations show that in 2019 the average number of days it takes for enterprises to receive cash for the credit sale are 176, 112 and 81 days for micro, small and medium enterprises, respectively. The problem of delayed payments increases as firm size decreases. The outstanding receivables beyond 45 days, among these 12,000 enterprises, were: ₹90 lakh for enterprises in the micro category, ₹7 crores for those which fell in the small category and ₹34 crore for those in the medium category. The actual extent of the problem is much bigger as not all MSMEs are included in the Prowess database. Even if one were to assume that 10% of India’s MSMEs were facing the problem of delayed payments, extrapolation would give a sum of ₹15 lakh crore. A recent report calculates that unlocking this amount as working capital is equal to an increase in the GDP by 0.42%.

The quantum and duration of delay are the two key factors that determine whether a transaction will yield its originally promised profit margin. Delayed payments entail four kinds of costs for firms — costs in retrieving payments in the form of personnel, time and effort; interest forgone beyond the prescribed period; business forgone due to working capital crunch; and losses due to non-reconciliation. The first two cost-heads squeeze earnings, while the latter two erode capital.

Given that in the present scenario of the pandemic, small enterprises are bogged down by both demand- and supply-side challenges, concerted efforts at easing cash flow and faster payment cycles are a much-needed policy intervention to ensure their survival.

While the government has taken steps such as setting up the online Receivables Discounting System (TReDS) and MSME Samadhan, they have not been very effective. Since its launch, Samadhan has registered a little over 75,000 cases. Only about 10,000 MSMEs and over 1,300 buyers are registered on TReDS. The Udhyam portal which automates the eligibility of enterprise to raise invoices on TReDS has itself seen only about 2.6 million registrations. Given these particularities, and limited applicability of solutions the way ahead seems to be more than just a technocratic fix. Power asymmetries between enterprises of different sizes, corporations and public sector units need to be neutralised towards making it viable for micro and small suppliers of products and services to do business. Easing the cash flow woes of small businesses is vital not just for their growth but their survival.

Kinjal Sampat leads research, monitoring and evaluation at the Global Alliance for Mass Entrepreneurship

The views expressed are personal