An estimated Rs 8.1 lakh crore is currently tied up in outstanding payments owed to micro, small, and medium enterprises, as per industry evaluations and governmental assessments. These dues are invoiced but often not settled within the anticipated time frames, frequently extending to 60 to 90 days or more.
This situation exerts immediate financial strain on MSMEs, as a significant portion of their working capital gets immobilized in receivables, sometimes reaching as high as 70 to 80%, thereby constraining their capacity to support their operations effectively.
In response, businesses resort to tactics such as delaying payments to vendors, reducing orders, or resorting to short-term borrowing. However, this borrowing often comes at a high cost, with interest rates in informal credit markets skyrocketing to 3 to 5% per month, eroding profit margins significantly.
It is common practice in extensive supply chains for larger companies to prolong payment cycles, which aids in managing working capital and decreasing the necessity for borrowing. Nonetheless, for smaller suppliers, this results in a discrepancy between cash inflows and outflows.
According to Arun Poojari, CEO and Co-Founder of Cashinvoice, large corporations essentially leverage MSME suppliers as a source of interest-free working capital, thus transferring liquidity strain down the supply chain, where smaller enterprises bear the brunt.
The issue of delayed payments is widespread and not subject to negotiations in many instances. As highlighted in a report by the Global Alliance for Mass Entrepreneurship, delayed payments are pervasive across various sectors, disrupting cash flows and production cycles.
The Economic Survey has identified working capital limitations as a significant hurdle for MSMEs, connecting them to restricted expansion and investment capabilities. It is estimated that delayed payments might be hindering GDP growth by 1-2% by impeding liquidity at the foundational level of the economy.
During periods of disruptions like the recent pandemic, payment cycles were further extended as companies preserved cash reserves, leaving MSMEs with minimal liquidity buffers. This led to supply chain disruptions and sluggish recovery in multiple sectors, underscoring the critical role payment cycles play in the overall economy’s resilience.
While policies and platforms like TReDS have been introduced to facilitate invoice discounting and encourage timely payments, longer payment cycles still prevail. MSMEs often find themselves dependent on a few major buyers with limited bargaining power, and although legal solutions exist, they are underutilized due to associated business risks.
The systemic issue of delayed payments continues to persist within supply chains, causing a lag in cash realization compared to revenue generation for MSMEs. Arun Poojari stresses that this challenge transcends mere working capital concerns and poses a systemic drag on the economy.
Delayed payments are not resolved; they get transferred within the ecosystem. Currently, MSMEs bear the burden of this risk, but the concern arises when they reach a point where they can no longer absorb it.