Bullying of SMEs by large players must stop

Vinod Sharma | Updated on May 02, 2018

Large customers call the shots when it comes to making payments to small units; the govt can help end this practice

Every conference, seminar and article on MSMEs (micro, small and medium enterprises) reminds us that they are the backbone of our economy, the pillar of our exports and the largest employers. Yet, a vast majority of these entrepreneurs and their enterprises suffer losses, face enormous challenges, are largely left to fend for themselves, before many of them fold up.

It would not be an exaggeration to say that their high mortality rate deserves similar attention as “farmer suicides”. A key challenge faced by most MSMEs is “finance”. Several enterprises are unable to overcome the road bump called “cash crunch”, shortening their life-cycles.

This is largely a B2B category of business, wherein their fortunes are tied up with those of their large customers. The payment behaviour of these large customers is perhaps the most important factor in the success or failure of SMEs.

An examination of the statements of accounts of several large companies will show a positive cash flow. These companies are at liberty to leverage their strength by sucking in working capital from their supply chain. On most occasions, when a large company needs additional funds, either for expansion or for the acquisition of a competitor or a brand, “delayed payment to suppliers” forms a ready source.

Several inorganic growth strategies are funded by extended payment terms with the vendors, in most cases without their consent. And if and when the large company makes a wrong call, and is rendered loss-making, the entire chain of suppliers, mainly SMEs have to bear the brunt.

The inordinately delayed judicial system ensures that no effective counter-measures are available to this “worshipped” community. This challenge in finance for SMEs is often articulated as “limited access to finance” or “high cost of finance”. The simple truth, however, is the problem lies with the ability of larger players to bully the SMEs.

The constrained SME entrepreneur spends a reasonable amount of his time begging for his own money, hoping that he will get it before its too late.

This payment behaviour is also a threat to the banking system. Stressed assets are not only the amounts shown in the books of large companies — they maybe concealed as delayed/unreported outstanding payments to suppliers.

The SME Act mandates that all such overdue payments of SMEs are disclosed. Several large companies have responded by rendering certified SSI units as ineligible suppliers. In a few cases, the vendor is forced to sign a declaration that they are not an SME enterprise.

The way ahead

A solution lies in issuing a credit card/payment gateway that ensures that vendors are paid on time as per agreed terms. This will also provide clear visibility to cash flow throughout a supply chain.

Denial of input tax credit on GST for unpaid bills is another simply way to ensure that B2B customers are encouraged to pay on time. The current rule disallows credits after six months of non-payment of bills. In the least, this period may be reduced to three months.

Export proceeds have an insurance cover (ECGC) that compensates without recourse, (up to 90 per cent) any loss on account of non-payments of invoices. In case of domestic trade however, such a coverage is available only with recourse.

Government could help the industry by creating a guarantee fund that allows insurance/factoring without recourse for all transactions. SMEs hence don’t need further worship — the need is to ensure that they are paid their money on time. Government, as a very large customer too, has often been a bad paymaster. They could lead the change, by example.

The author is Managing Director, Deki Electronics, and Chairman, CII National ICTE Committee.

Published on May 02, 2018

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