The issue of MSME financing gap

Synopsis: Micro, small and medium (MSME) enterprises act as the backbone of wealthy economies. However, pandemic has worsened the issue of delayed payments for their goods and services. It is causing MSME financing gap. 

What are the issues facing MSMEs? 

Micro, small and medium (MSME) enterprises are the backbone of a healthily balanced economy. 

They supply components, intermediate goods and services at competitive prices to big companies.  

However, they receive delayed payments for their goods and services. It results in large portions of working capital being blocked. This issue, coupled with often-inadequate credit at reasonable cost, leaves them financially unviable and unable to plan for growth. 

Further, second wave of covid and its associated lockdowns have again aggravated their situation.  

As per a recent report, Unlocking Credit for India’s Job Creators, the total outstanding payments to be made to registered MSMEs by buyers in India could be about ₹15 trillion. 

What are the government measures for MSMEs? 

• The MSME Development Act of 2006 proposed guidelines for resolving the problem of delayed payments. Further, the Factoring Regulation Act, 2011, helped codify the factoring business to address payment delays. 
• Emergency credit support measures have been announced and several compliance requirements have been temporarily relaxed. 
• Trade receivables discounting system (TReDS): TReDS was initiated by the Reserve Bank of India (RBI). This unified platform facilitates the financing of trade receivables of MSMEs from corporate and other buyers.  

• TReDS provides easy access to funds at market-discovered rates of interest. The MSME ministry has mandated the registry on the platform of companies with over ₹500 crore in turnover.  

• Some purchasers avoid transacting on TReDS as they could lose the flexibility of deferring payments to MSME suppliers.  

Suggestions 

Jayant Sinha committee: A standing committee on finance headed by Jayant Sinha has recommended integrating the TReDS platform with the GST network’s e-invoicing portal.  

• This would grant buyers and sellers access to e-invoices through a single window for factoring and also enhance competition and liquidity, reducing the price of factoring. 
• Apart from generating higher volumes of invoices, it would also be desirable to have more financers on these platforms. 

More NBFC Involvement: Non-banking financial companies (NBFCs), with their domain expertise in certain sectors, can easily digest the high risk of financing invoices from lower-rated firms.  

• However, an NBFC needs to have 50% of its total assets/income from the factoring business to register on TReDS as a ‘factor’.  
• Thus, government should allow more NBFCs to join the TReDS by amendments to Factoring Act.  

U.K. Sinha committee: U.K. Sinha committee recommended that a credit enhancement mechanism for extending guarantees to the invoices accepted by smaller/lower-rated corporates be evolved. 

Many initiatives have been taken, however the issue of MSME finance gap persists. Thus, Industry associations and chambers of commerce must get their members to embrace a culture of payments to MSMEs on time. 

Source – Livemint