Choked by dues: What efforts are being taken to ease the biggest problem faced by Indian MSMEs?
The bottom of India Inc’s food chain — the MSMEs — feel the sting of late payments the most.
It was partly Kalkat’s fault. Frrole’s service was down 20% of the time over a two month period due to some glitches. He offered to waive two months’ fees. The customer, however, said he would pay for just two of the six months. “He said he used our service for only two months,” says Kalkat.
The customer’s logic was that Frrole did not incur any extra cost for the software. After “crazy” back-and-forth communication for months, a frustrated Kalkat wrote off four months’ worth payment. “The only recourse was legal. I didn’t want that,” he says. Barely 30% of his payments from Indian customers come on time. “It is always a struggle. Overseas, it is so much better.”
Far away from India’s Silicon Valley, Faridabad-based Chandrashekhar Goel handles payment problems in another way. The 62-year-old head of Goel Engineering, an under- Rs 10 crore entity that makes perforated steel sheets, says a public sector undertaking (PSU) customer wanted a 100 day payment cycle. Goel refused. The bureaucrat handling the PSU threatened to blacklist him.
“Before you blacklist me, I blacklist you,” Goel told himself and stopped doing business with the PSU. Over years, he has pared down his PSU customers. “Payments have gotten worse in the last three-four years. Business is down. Suppliers are plenty. Bureaucrats take a ‘no’ personally and make it a prestige issue, so you don’t get business in future,” he says.
Payment delays have for long been a huge problem for India Inc. Last year, an EY report estimated that Rs 1.8 lakh crore was trapped in India Inc’s balance sheet mostly as receivables — the money that a company receives for goods or services it has delivered to a client or customer. But it is companies at the bottom of India Inc’s food chain — the small and medium enterprises (MSMEs) — who feel the sting the most. Media reports estimate that large corporations owe Rs 40,000 crore and PSUs Rs 48,000 crore to MSMEs.
What Our Survey Revealed
ET Magazine conducted an online survey of 119 MSMEs to understand the growing problem of payments delays
Small, powerless and often unorganised, these small businesses do not get the attention they deserve. But they are critical. According to a recent report by Zinnov, India has over 75 million small and medium businesses that contribute 40% to the gross domestic product, employ 180 million people and contribute 52% of India’s $535 billion exports. Yet, with limited financial means, MSMEs often swing between life and death. During good times, their situation is tenuous. In bad times, it turns fatal. Receivables pile up, shrinking their working capital.
The issue came to the fore in September when Finance Minister Nirmala Sitharaman took note of it. She asked all government departments to promptly clear dues of MSMEs, who were hurting badly. “Delayed payment is among the biggest problems that all Indian firms face,” says a senior bureaucrat in the ministry of MSME. “For MSMEs, it is a matter of life and death. We are working to address it on priority.” In January, the Reserve Bank of India (RBI) set up a committee, under former Sebi chairman UK Sinha, to study the financial problems of MSMEs and recommend solutions. “The report’s recommendations are being studied and a legislation will be brought in soon,” the bureaucrat adds.
Anil Bhardwaj, secretary general of Federation of Indian MSME, says the biggest payment delays are by the government itself largely due to corruption, insensitivity and inefficiency. Madan Sabnavis, chief economist, CARE Ratings, says: “Receivables/sales ratio typically increases during difficult times. There is a fear of NPAs rising among MSME.”
MSMEs have been reeling under a spate of disruptions since demonetisation in 2016 and the goods and services tax (GST) rollout in 2017. Then came a spiralling liquidity crisis, poor consumer demand and rising inventory. According to a recent RBI report, 1.92 lakh MSMEs have been classified under the Framework for Revival and Rehabilitation of MSMEs — which aims to give them relief and concessions — between October 2018 and March 2019. Chandrakant Salunkhe, president, SME Chamber of India, says in the last 18 months, over 9 lakh MSMEs have shut down.
Delayed payments lie at the heart of MSME woes. “You cannot deliver goods even a day late. But I will pay you when I feel like. The contract is always skewed,” says Bhardwaj, referring to the big firms’ attitude towards smaller vendors. At times, it is a question of intent. “Hold his payment. Supplier ko langda bana do. Show him his place” — these are the common refrains says a CXO-level executive with over three decades of experience.
And this isn’t just about small versus big. Cultural undercurrents shape patronising behaviour. “Any act of providing service or product establishes hierarchy and subservience. The person paying is always superior,” says Santosh Desai, CEO, Future Brands. Demanding payment for work duly done is always a delicate dance. The undertone is “you should be grateful for being paid,” he adds.
A Delhi-based founder of a data analytics startup recalls a recent episode with a large media and entertainment firm. The startup signed the contract with the CEO of the larger company’s digital business. Just when the project was delivered, the CEO was fired.
“60% of our payment got stuck. We moved from pillar to post with little luck,” he says. The reasons for payment delay kept changing — “the amount is beyond budget”, “the CEO was not authorised to sign the deal”, “the accounts team is vetting”. After much cajoling and pleading, they got paid after five months. “There is no balance in the relationship. Life is always on the edge. We never have cash for more than 45 days of our expenses,” says the startup founder. A customer can call any time for work but when it comes to payments, the phone lines suddenly go cold.
“They stop taking calls. But they have no shame in asking us to do more work. This unequal relationship has been totally normalised.” GST rules have worsened the situation. The same founder says one of his customers defaulted and there is no hope of payment. “But I have already paid 18% GST on the invoice in advance. How do I survive?”
“There is a constant tendency to squeeze out vendors,” says Vijendra Rawat, founder of Delhi-based Color My Brand, which is in the business of corporate gifting. In the past five years, he has stopped working with companies that have a payment cycle of more than 60 day and with sectors notorious for payment issues, like ad agencies and event management firms.
“I have to pay in advance to get my consignment. My customers don’t.” Now, he insists on 50% advance and only works with firms that have a reputation of paying within 30 days. Chandigarh-based Nikhil Dwivedi, founder of EYP Creations, also faces similar issues. So he prefers to chase measured growth. “ I don’t take needless risk and grow at a pace where my finances are under control.”
But not many have the luxury of picking their customers. Pavan Panchamukhi, cofounder of payment processing solution provider BluPay, has one of India’s top retailers as a customer. In retail formats where his product is critical, he says, payments are done within seven days. Else, multiple reasons are given for delays. “It is so much about criticality of your product.” Once, in a dire situation, he reached out to the founders. “Payments were released within a day. But you can’t do that frequently.”
According to the MSME Act, delayed payments to MSMEs can lead to a penalty. So Kalkat’s customers are smart. “Whenever there is a payment delay, they want you to change the invoice date to avoid penalty. I have no choice.” Goel says his invoices are dated on the day the product is shipped. The shipment might reach the customer in 10 days. But they will take weeks — often deliberately — to acknowledge its receipt.
“Your invoice date has no meaning.” “The biggest worry for Indian MSMEs is getting customers,” says Aditya Tulsian, CEO of Numberz, an outfit that helps companies recover their dues faster by automating processes. “The second biggest is recovering dues.”
Indian firms have the worst payment record in Asia-Pacific. A report by credit insurance firm Euler Hermes on average day sales outstanding, says Indian firms take 67 days to get their payments against the global average of 65. It takes 51 days in the US, 64 in Brazil and 92 in China. India doesn’t look bad here but averages hide the ugly payment culture MSMEs face. “Average for SMBs would be significantly higher. That data is not available. But based on our limited data, it would easily be 88-92 days,” says Tulsian.
Many initiatives have been rolled out to tackle payment woes of MSMEs but success has been limited
Anecdotally — and as revealed by an ET Magazine survey — process-driven MNCs fare much better than others. Government and large private Indian firms are the worst offenders. But MSME customers are also at fault, says Pawan Bindal, cofounder of TimePay, who has studied Ministry of Corporate Affairs’ data of 300 businesses. “We found large customers pay their suppliers within 86 days, while MSMEs take around 119 days.” Trade transactions between MSMEs comprise over 80% of all trade transactions, he adds.
The problem is partly cultural. “Relationship hierarchies have a strong influence in shaping financial transactions (leading to payment delays) in Indian society,” says Desai. Tulsian disagrees. “My analysis suggests that intentional delay is not more than 20%. At least half the payment delays are due to procedural non-compliance.” MSMEs mostly have manual processes. Simple things like understanding a firm’s vendor payment cycle — say it ends on the 5th of a month so an invoice deposited on the 6th will be processed in the next cycle — can make a difference. Often, GST details are wrong or mismatched.
Most firms prioritise vendor payments. So, the most important ones get paid first. Globally, Dun & Bradstreet has a payment performance index where vendors vet companies’ score before doing business with them. But the score has got little traction in India. All these factors amplify the woes of MSMEs, already struggling with an economic slowdown and liquidity squeeze. However, a combination of government and the private sector initiatives is holding out some promise.
Vivek Kumar, cofounder of Excubator, says invoice discounting platforms like KredX, Capital Flow and Drip Capital help MSMEs get paid immediately on the basis of future payments. Rohit Pansari of Industrybuying.com, a startup that aggregates procurement of large firms, uses KredX. Based on a tripartite contract, when an invoice is uploaded, Pansari’s customers accept it.
Then Kredx proposes a discount on the invoice and releases money promptly. But this is limited to large customers. There are startups like TimePay and Numberz who work on receivables and working capital management, almost like a virtual collection manager, helping companies automate the process of submitting invoices to sending email reminders. This gives MSMEs better visibility of their receivables and the timelines.
The government, on its part, is tightening the regulatory framework. Vinod Harith, cofounder of Chennai-based CMO Axis, says being a registered MSME has been a big help. The government has made it mandatory for audited companies to declare payment dues to MSMEs within 45 days. “Due to our MSME certificate, our customers pay us on priority basis. Over 90% of my customers pay within 30-45 days.” A MSME can also take a company to the National Company Law Tribunal if the dues are over Rs 1 lakh. Girish Batra, founder of Noida-based firm NetAmbit, has taken one of his real estate customers to the NCLT to recover dues worth over Rs 75 lakh.
The government has also set up MSME SAMADHAAN — which monitors delayed payments. In 2016, thanks to the government’s push for a trade receivables e-discounting system, three receivables exchanges were been set up to catalyse invoice discounting and boost liquidity for MSMEs. From Rs 300 crore transactions in 2017-18, all three exchanges did bill discounting worth Rs 5,500 crore in 2018-19, and will likely cross Rs 12,000 crore this financial year.
“Business volumes for SMEs are pegged at Rs 14 lakh crore. The potential is enormous,” says Sundeep Mohindru, CEO, M1Xchange, one of the exchanges. Right now, “companies are registering but not transacting,” says Ketan Gaikwad, MD, Receivables Exchange of India.
The RBI committee under Sinha has recommended setting up an information utility where all MSMEs have to mandatorily upload their invoices above a certain amount. This would help to automatically generate details of defaulters. The problems of small businesses are complex. The ongoing push to formalise the economy has amplified their challenges. But every challenge is an opportunity. Hopefully, the government will use the MSME crisis to resolve the issues on a priority basis.
Big Pain for Small Biz
75 million small & medium businesses contribute 40% to GDP and employ 180 million people
Big corporates owe Rs 40,000 cr and PSUs Rs 48,000 cr to MSMEs
MSMEs are weak, small and unorganised and have limited bargaining power with banks as well as their customers
Already reeling under note ban and GST, they have been hit hard due to poor financial cushion and advance GST payments
Amid economic slowdown and poor liquidity in large firms, MSME vendor payments are among the first casualty
All About TReDS Exchanges
In 2015, RBI allowed setting up of the Trade Receivable e-Discounting System to help discounting and settling of invoices. The government mandated that invoices raised by MSMEs on companies that have a turnover of more than Rs 500 cr should be listed on TReDS, where factoring services or bill discounting can be performed.
In factoring, a financial institution that buys out the supplier receivables deals with the big company that has to give the payments.
Three TReDS exchanges — M1, RXIL and ATREDS — have been set up since then. In 2017-18, all the three exchanges put together handled transactions of Rs 300 cr
In 2018-19, that value went up to nearly Rs 5,500 cr and in 2019-20, the transaction value is expected to rise to between Rs 12,000 cr and Rs 15,000 cr
But this is just the tip of the iceberg. Business volumes of small and medium business is estimated at be around Rs 14 lakh crore annually. Large companies have started transactions on the exchanges. But the biggest challenge has been that while PSUs have registered on the platform, few are transacting on it.