Policy And Behavioural Changes Can Fill The MSME Financing Gap

Context: Much can be done on several fronts to relieve small businesses of their problem of payment delays.

Significance of the Micro, Small and Medium Enterprises (MSME) sector

• Backbone of the healthy balanced economy: They supply innumerable number of components, intermediate goods and services at competitive prices to large original equipment manufacturers and industry majors.

Issues faced by the MSMEs:

• Financing gap: Delayed payments resulting in large portions of working capital being blocked coupled with inadequate credit at a reasonable cost.
• According to the Unlocking Credit for India’s Job Creators report by the Global Alliance of Mass Entrepreneurship (GAME), total outstanding payments to MSMEs in India could be about Rs 15 trillion.

Government initiatives to address the financing gap of MSMEs

• In the early 90s, the Small Industries Development Bank of India (SIDBI) evolved a receivable finance scheme to obviate delayed payment situations.
• The 1993 Interest on Delayed Payments to Small Scale and Ancillary Undertakings scheme: Sought to mitigate burden by defining day of acceptance, deemed acceptance and specifying payment of interest.
• The MSME Development Act of 2006: Proposed guidelines for resolving the problem of delayed payments.
• The Factoring Regulation Act, 2011, helped codify factoring business to address payment delays.
• The Trade Receivables Discounting System (TReDS) initiated by RBI is a unified platform for sellers, buyers and financiers to facilitate the financing of trade receivables of MSMEs from corporate and other buyers, including government departments and public sector undertakings (PSUs).
  • MSME ministry has mandated registry on the platform of companies with over Rs 500 crore in turnover.

Way forward

• Bring in flexibility to the TReDS framework: An option to defer retirement of accepted invoice on TreDS up to a maximum of 180 days by paying additional interest of 2%, above the contracted rate of interest.
• Leverage GST framework: For efficiency gains as noted Economic Survey 2018.
  • Jayant Sinha Committee has recommended integrating the TReDS platform with GST network’s e-invoicing portal.
  • Anticipated benefits: Integrated single-window factoring for buyers and sellers, enhanced competition and liquidity.
• Amend Factoring Act: Diluting factoring norms for NBFCs as promised in 2020-21 budget, allowing more NBFCs to join TReDS.
• Develop a credit enhancement mechanism: For extending guarantees with respect to invoices accepted by smaller/lower-rated corporates be evolved, as recommended by the K. Sinha committee.
  • This could be facilitated by the National Credit Guarantee Trust Corporation and the department of financial services.
• Leverage private sector initiatives: Open Credit Enablement Network and iStack, have been devised to bridge the MSME finance gap.
• Employ behavioural approach: Industry associations and chambers of commerce must get their members to embrace a culture of payments to MSMEs on time.