Small and micro enterprises (SMEs) are facing elevated working capital pressures, largely on account of rising receivables and lack of a similar increase in creditors, according to India Ratings and Research (Ind-Ra).

The increase in receivables has largely been driven by higher commodity prices — particularly key inputs such as steel, cement and crude derivatives — along with delayed payments from large customers, the rating agency said in a report.

Additionally, credit terms from key suppliers have not been extended.

Rise in SMEs receivables

A sustained rise in receivables amid adverse environment will limit financial flexibility of SMEs, said Soumyajit Niyogi, Director, Ind-Ra.

Per the rating agency’s analysis of the top 1,500 non-financial large corporates, their payables to SMEs as a proportion of total payable have risen above 1 per cent on a sustained basis since FY18.  

The stretch in payables to SMEs has been more pronounced from FY20, as liquidity management has become a key internal monitorable among large corporates given macroeconomic uncertainty, Niyogi said.

Ind-Ra’s analysis suggests that payables to SMEs by top 10 large corporates (as per total debt) as a percentage of the total payables clocked 1.24 per cent in FY21 (0.35 per cent in FY18; 0.1 per cent in FY12).

The rise has been sharpest for the top 51-100 bucket to 2.76 per cent in FY21 from 0.12 per cent in FY15. Although the quantum of payables to SMEs is less significant as compared to the total payables for large entities, it is still onerous for SMEs, the agency said.

Covid affected sectors

Sectoral data suggest that sectors that had faced high financial challenges owing to the Covid-19 pandemic have shown a higher degree of increase in payables to SMEs as a percentage of the total payables than less affected ones.

The affected sectors include consumer durables, capital goods, electricals, automobile and ancillaries.

Contrary to a delay in payables to SMEs, analysis suggests that the payable days on an aggregate basis have not changed. In some buckets, a moderate improvement is visible. That being said, Ind-Ra noted that the rise in payable is not broad based, and is rather more to do with SMEs.

Sharp rise in input costs

The agency observed that although most SMEs work on fixed-margin basis where cost is passed through to large entities, financing for inventory is required.

“As a consequence of the sharp rise in input costs, working capital requirements will shoot up. Going by the current trend of increasing receivables, the situation will only exacerbate their challenges,” said the analysis.

ECLGS helped alleviate liquidity stress

The agency added that timely disbursement of Emergency Credit Line Guarantee Scheme (ECLGS) had helped SMEs absorb such surge in working capital requirements in FY21 and FY22.

Although the extension of ECLGS could alleviate some of the stress, the same would put further burden on their debt metrics. Moreover, not every entity would have unutilised limits available for incremental borrowings, Niyogi said.

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