Indian micro small and medium enterprises (MSMEs) are a diverse and heterogeneous group. But they face several common ecosystem-related problems.

Some of these are: a multiplicity of labour laws; inadequate infrastructure facilities; problems in procurement of raw materials at a competitive cost; supply to government departments and agencies; lack of access to modern technology; lack of skilled manpower; and, perhaps most important of all, the issue of timely availability of finance at the right cost.

The timely availability of finance and payments are key expectations of an MSME from banks and customers.

However, the high cost of credit and finance, collateral requirements from financial institutions and, most importantly, the issue of delayed payment virtually cripples MSMEs.

In order to address the issue of delayed payment, section 15 of the Micro Small and Medium Enterprises Development (MSMED) Act, 2006, obliges the buyer of any goods or service to pay the supplying MSME within 45 days of acceptance. Despite this provision, the problem persists.

The MSMEs often do not take action for fear of losing orders.

To ease financing for MSMEs, the RBI is in favour of permitting trade in the receivables of MSMEs and intends to facilitate electronic bill factoring exchanges so that MSMEs are paid promptly.

Factoring services

This move is a welcome step for MSMEs, particularly those faced with a working capital crunch. They could sell their receivables on discount before the stipulated 45 days.

However, those who can wait for the stipulated period of 45 days will not appreciate this move. It may create a climate where they are effectively persuaded to discount their receivables, despite working on thin margins.

Therefore, there is a need to look into strengthening the norms on payment delays, so that MSMEs are not hit. It is also time to revisit the factoring services that were introduced a long time back.

Under this, an enterprise sells or assigns its invoices to a finance company at a discount in exchange for immediate money to finance its ongoing business.


MSMEs are apprehensive about factoring, not being entirely aware of its utility and complexity. Moreover, they are hesitant about disclosing commercial details to a third party and anxious about the recovery procedures used by factoring companies. Factoring services are yet to gain popularity over traditional or other lending methods. The high cost is another deterrent.

Another problem with factoring is its potential to cause a misunderstanding between enterprise and client — with one pre-judging or misjudging the other’s financial condition. This is, of course, besides the high cost of finance itself. Therefore, the RBI should consider issues that have prevented the effective uptake of factoring serviceswhile devising the framework for electronic bill factoring exchanges.

Addressing the issue

A possible approach towards addressing the issue of delayed payment could be setting up an agency dedicated to this task. All MSMEs should provide a list of receivables after 45 days to this agency along with documented proof. This agency could take strict action and upload a list of defaulters on its website.

This will also help MSMEs maintain a healthy relationship with large companies, while getting their dues on time.

However, will such a body be able to completely resolve the issue? Only to an extent, as the root cause of the problem is that registration of MSMEs is voluntary.

The MSMED Act states that registration is compulsory only for medium-sized manufacturing enterprises. It is well known that over 95 per cent of MSMEs in India are not registered.

The application of the MSMED Act is restricted to a minuscule number of MSMEs. Tighter norms on delayed payments may encourage buyers to move towards non-registered MSMEs.

Therefore, registration at least for MSMEs engaged in manufacturing activities should be made mandatory.

This will certainly help strictly implement the delayed payment clause in the MSMED Act.

(The author is Chairman, FICCI-MSME Committee and Managing Director, Hindustan Tin Works Ltd.)