India is home to the world’s biggest micro, small and medium enterprises (MSMEs) community (more than 60 million) who contribute around 29.7 per cent of the country’s GDP. Despite being the vital cogs of the economy, MSMEs often struggle to access affordable finance necessary for their growth and sustainability. Low credit worthiness is a major stumbling block for MSMEs to secure loans as they do not have economic size to operate and often their models are not scalable, said Madan Sabnavis, Chief Economist, Bank of Baroda, in an interaction with this publication. 

While complex regulatory procedures and lack of access to low-cost finance are some of the daunting obstacles faced by MSMEs in India, delayed payment by the buyers is another big obstacle in the growth of MSMEs, especially for micro & small (MSEs). 

To promote timely payments to MSEs, the government introduced a new clause (h) in Section 43B of the Finance Act 2023 mandating the buyer to pay the MSE within 45 days of the supply. When this provision was announced in Budget 2023 it was welcomed by MSEs, as it was intended to help them in tackling the problem of working capital. 

However, towards the end of FY 2023-24, the micro and small enterprises faced a peculiar problem. Buyers (large and medium enterprises) either started cancelling orders with the registered MSMEs and placing these orders with unregistered MSMEs, or forcing their MSE suppliers to de-register under the MSMED Act, 2006. This led to major loss of revenue to MSEs. As a result, the regulatory change, which was supposed to be a boon, turned out to be a bane for them. 

Typically, the payment cycle varies between 60 to 180 days depending upon the industries. By applying the rule to all MSEs and industries, the government was forcing the buyers to change their entire payment and business cycle to 45 days at one stroke – a taunting task, virtually impossible given the current financial situation.

While a MSE (if they buy from another MSE) have to adhere to Section 43B(h), it is not applicable to government agencies (Union as well as states) like ministries, departments and PSUs, who account for a major share in MSEs’ order book. So, while government agencies continue to follow their old payment cycle, it affects MSEs for whose benefit the section was added. As per the Samadhaan portal, under the MSME Ministry, central & state agencies account for about 37 per cent of the total outstanding amount (Rs 435.49 billion) payable to MSEs (who have approached the Samadhaan for resolution) by various entities, as of 30 May 2024. Also, Section 43B(h) only supports the micro and small manufacturers, not the medium sector. 

While MSEs agree that reducing payment cycles is in their interest, they want government to include all segments (medium enterprises, traders, and government agencies) to ensure equitable treatment by buyers and the pay cycle should reflect the ground realities. With Finance Minister Nirmala Sitharaman, in a media interaction on 28 May 2024, hinting at the Centre’s willingness to reconsider the 45-day payment rule for MSEs (if the industry wants it), one can expect some relief for MSEs in the July budget.