Written By Arun Poojari:
Micro, small and medium enterprises (MSMEs) are the lifeblood of the Indian economy, with a 30 per cent contribution to the GDP and 35 per cent of annual gross value added (GVA). However, what needs to be understood is the impact of delayed payments to MSMEs on the operating cycles. Financial support is needed to strengthen MSMEs to meet working capital requirements and scale up their business.
Delay in payment is a major issue in the MSME sector. Legally, when buyers delay payables to their suppliers by 45 days, delayed payments arise. A whopping Rs 10.7 lakh crores – is locked up in delayed payments from buyers to suppliers – an estimated 7.8 per cent of the GDP in the Indian economy, with 80 per cent of this estimated amount owed to small and micro enterprises, totalling Rs 8.55 lakh crore.
There is a need for a robust digital ecosystem that bridges a gap to resolve the delayed payments challenges. Digital solutions that bring together government, corporates, financiers, and finance enablers such as credit bureaus and fintechs are key to mitigating and addressing the problem of delayed payments.
Role of Three Central Pillars
Global Alliance for Mass Entrepreneurship (GAME) recommends a coordinated, ecosystem-wide effort with three central pillars at the head to address the problem of delayed payments: Finance Enablers and Financiers, Government and Policy Makers, and Large Enterprises, including PSUs.
With the support of these pillars, specific actions can be taken to alleviate the problem of delayed payments which include – enhancing cash flow-based lending through the provision of on-tap, easy-to-use credit guarantees, the proliferation of credit scores that use alternative data sources for new-to-credit customers; leveraging TReDS by integrating GST data and the provision of operationally light credit guarantees (specifically for factoring transactions) and re-imagining the process of dispute resolution for delayed payments through online portals.
Let’s understand the measures to be taken to resolve MSME’s payment issue:
Strengthening Cash Flow-Based Lending: The availability of working capital through financial institutions is necessary for the economic survival of MSMEs. Changes in the Indian ecosystem over the past decade, such as a Unified Payments Interface (UPI), Goods and Services Tax Network (GSTN), mandatory e-invoicing for businesses over a certain revenue threshold, Central Know Your Customer ( CKYC), etc., have all combined to create the ideal environment for Cash Flow based Lending to flourish.
Provision of Credit Guarantees: Include cash flow-based lending as part of government-sponsored credit guarantee schemes. The Emergency Credit Line Guarantee Scheme’s (ECLGS) success in recent years may be used as a template to establish such a scheme. Additionally, it makes sense to test a state-level credit guarantee scheme in partnership with Fintech companies that may be unable to expand current CFL programs in particular regions. Another program that can support this direction is a recently announced joint initiative of the World Bank and the Government of India, the Raising and Accelerating MSME Performance (RAMP) scheme.
The Proliferation of Credit Scores for New-To-Credit Customers: One of the biggest challenges for an MSME to access credit is the need for a credit score that only accounts for businesses already availing of a credit facility. Here is the FIT Score, a new product developed by TransUnion CIBIL and a digital lending platform for MSMEs Online PSB Loans (OPL), based on GST data, ITR returns (which is a proxy for balance sheet and P&L), and current bank account details. These details are set against the company’s repayment data to develop correlations and create buckets of the FIT Score, accelerating lending decisions. Moreover, creating a Public Credit Registry (PCR) may be a more powerful tool to address this gap.
Strengthening TReDS by integrating GST data: The Standing Committee on Finance proposed integrating TReDS portals with the GST e-invoicing portal. Additionally, once invoice information is made accessible on TReDS, the buyer’s Input of Tax Credit reports can be used to verify the reliability of an invoice and use it as a deemed acceptance of the bill. Factoring transactions can then be taken up with greater ease.
Provision of Credit Guarantees for Factoring Transactions: Credit Guarantee Fund Scheme for Factoring (CGFSF) reduces risk aversion among banks. This scheme, established by the Government of India to promote ‘factoring without recourse,’ offers a credit guarantee cover wherein the first loss of 10% of the amount in default is to be borne by factors, and the remaining 90% of the amount is to be borne by National Credit Guarantee Trustee Company (NCGTC) and Factors in the ratio of 2:1 respectively. Integrating CGFSF with TReDS will enhance financial institutions’ risk appetite to discount invoices with lower credit ratings, i.e., BBB and lower, incentivising buyers to transact on the platform.
Conclusion
Despite their importance to the economy, MSMEs in India have been particularly plagued by difficulty accessing formal finance, among other challenges such as barriers to ease of doing business and high costs. International Finance Corporation (IFC) estimated that 70% of MSMEs’ credit needs are towards financing working capital requirements. GAME’s report highlighted delayed payments as one of the key reasons behind the working capital crisis faced by MSMEs. Solutions addressing the ‘wicked problem’ of delayed payments are paramount to overcoming the barriers to accessing finance and putting MSMEs and the Indian economy on their growth path.
(The author is the co-founder and CEO of Cashinvoice)
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