Inter-firm or trade credit (TC) payment delays and defaults remain an endemic and intractable problem. It has assumed systemic proportions specially for non-corporate businesses, including MSMEs, in the recent years. A research report by Dun & Bradstreet and Global Alliance for Mass Entrepreneurship (May 2022) estimated that ₹10.7-lakh-crore is annually struck in delayed payments to MSMEs — 80 per cent of this related to micro and small units.

Further, median debtor days beyond the 45-day regulatory payment period was 195 days for micro units and 68 days for small units in FY2021. D&B data show that the trade receivables scenario for micro and small companies has deteriorated, following demonetisation and GST.

The RBI’s annual study of select public limited companies shows the receivables-to-sales ratio of companies with turnover of ₹1-25 crore surged from 36 per cent in FY 2019 to 40 per cent in FY 2020 and further to 60 per cent in FY 2021. Transmission effects of unanticipated delays/defaults in TC repayments are felt across the payment system.

Government measures

The government has taken multiple legal, regulatory and promotional measures since 1993 to overcome the payment problem. These measures include prompt payment laws, promotion of bills discounting, factoring, TReDS, and Samadhan platform.

However, extraordinary lengthening of payment period, large backlog of receivables and rising cases of strategic defaults in recent years indicate that these measures have serious limitations.

History shows that the repayment behaviour, business trust and liquidity conditions can change dramatically during times like demonetisation, GST, and Covid-waves, seriously impacting the TC ecosystem. The integrity of payment practices, business conventions, and credit discipline are affected.

A pre-Covid survey of payment practices by Atradius finds a three-fold increase in write-offs of uncollectable debts and doubling in average value of long-overdue invoices. The Covid-waves greatly aggravated these. In the absence of self-correcting mechanisms, repayment morality in TC network is on the decline.

Power asymmetry between small suppliers and large purchasers and fear of losing business in case of late payment complaint enable large firms to manipulate date schedules relating to chalan, invoice, purchase order, or goods acceptance. Despite the best efforts of the government, these problems continue. However, a system driven digital platform can overcome these.

Fortunately, we have GSTN which is also now recognised by the RBI as an accounts aggregator network (a financial data-sharing system). We can use GSTN digital platform by incorporating new input fields and triggers for monitoring and system driven action against delayed payments and defaults in B2B dealings.

The input fields and action triggers include:

Due date of repayment and payment receipt date;

Automatic raising of red flag in GST account of TC debtor after a 10 days overdue, and if repayment amount is less than 90 per cent [to take care of discounts etc.]

Raising of second red flag if account remains overdue for 20 days; third red flag on 30th day with the provision of digital reporting of late payment to borrower’s bank, CIBIL, Ministry of Corporate Affairs (corporate cases) and stock exchanges (listed companies); fourth red flag after 60 days and suspension of GST account or imposition of monetary penalties if overdue persist above 90 days

Designing of rating system in GSTN for TC operations of firms

Linking of bank payment system to update payment receipts in GSTN system. Till this linking is done, the payee may update the payment date and seller may validate it in the system

In case of dispute, a government-accredited industry forum representing trade and industry associations/chambers may solve/arbitrage the dispute in a time-bound manner. During this time, the red-flagging process will remain suspended.

To begin with we may restrict this to firms with annual turnover of ₹100 crore or ₹500 crore and above. Initially, we may take a lenient view of the delays as TC and its repayment flows may take sometime to stabilise. For large corporates, it may not be a problem as, on an average, their working capital utilisation is about 50 per cent of their sanctioned limit.

These are just broad contours. They need to be validated and fine-tuned by a committee comprising representatives of trade and industry, GSTN, government, RBI, and legal experts. Necessary changes may be made to the model based on the committee’s recommendations.

This is an inclusive approach and not confined to MSMEs. Bank credit risk is interconnected with B2B payment flows. Presently, CIBIL’s credit risk analysis is confined to banks’ and NBFCs’ dealings. This partial analysis suffers from unknown risk arising from TC operation of a firm.

With the integration of TC operations, the credit analysis becomes inclusive. Banks also get to know the cash flow matrix of their clients. This will facilitate cash-flow based lending, better monitoring of account and stock financing.

Higher speed of payment cycle enhances liquidity distribution. It will also encourage greater formalisation of business dealings which is both revenue and growth positive.

The writer is former DGM, SIDBI