Slowdown hits SMEs hard as big companies delay payments

Slowdown hits SMEs hard as big companies delay payments

New Delhi: As India’s economy begins to slow after expanding by at least 9% for the past three years, some large companies are delaying payments to suppliers, resulting in some of these suppliers going out of business or laying off jobs, according to associations that represent so-called small and medium enterprises, or SMEs.

Such defaults also highlight the violation of a law passed in 2006 to protect small enterprises. According to the Micro, Small and Medium Enterprises Development Act, large companies that source products or services from small enterprises have to pay them within 45 days. While the law says SMEs can complain to centres in their respective states in case of non-payment and that such complaints will be addressed within 90 days of being filed, the associations claim that this is rarely the case.

And that’s when the state has a complaints body.

The complaints body in Tamil Nadu received 500-600 complaints in the past year, mostly against companies in the automobile, heavy equipment and power equipment businesses. Thus far, only 42-45 complaints have been addressed, said Gandhi Kumar, president, Tamil Nadu Small and Tiny Industries Association.

Maharashtra, which has at least 1,400 industrial estates out of which SMEs operate, is yet to set up a complaints body. Such bodies exist in Uttar Pradesh, Andhra Pradesh, Gujarat and the north-eastern states but they’re barely functional, say the associations. Only SMEs in Punjab do not face payment issues, said Joginder Kumar, president, Federation of Tiny and Small Industries of India, and a first-generation entrepreneur, who runs hand tools production units in Ludhiana.

Last week, representatives of SMEs met Prime Minister Manmohan Singh and urged him to intervene. Anil Bhardwaj, secretary general of Federation of Micro and Small and Medium Enterprises, said around 20% of India’s 13 million SMEs supply goods and services to bigger companies.

The associations say that in most cases payments are made after six months, and sometimes after a year, exceeding the 45-day credit period stipulated by law. Large companies are also required to mention payments to small enterprises according to the Companies Act. A random survey of seven large companies based out of Uttar Pradesh showed that this wasn’t being done, said Praveen Saldana, president of Indian Industries Association, which has 45,000 direct and indirect members with representations from handicraft, leather and glass manufacturers.

Such buyers conveniently blame quality, he added. “After receiving their material, many big companies withhold payment saying the material is under inspection."

“If you want to delay payment, you can have many reasons," said Prithvi Raj, who runs a small packaging firm, Bharat Printing and Packaging in Bangalore. “(Big) companies have always delayed payments by 90-180 days. The economic slowdown has now put them in a tighter spot as the priorities of this sector are pushed too far below the ladder."

India’s industrial landscape is dotted with SMEs. They account for 40% of the country’s manufacturing output and almost half its exports. In Maharashtra, for instance, SMEs produce around 8,500 products from plastic to scientific appliances. They contributed 80%, or Rs30,000 crore, to the state’s tax revenue. In Tamil Nadu, the comparative number was Rs20,000 crore, according to Kumar.

“Because the units do not get credit and payment on time, about 1.82 lakh units have closed down in Maharashtra in the past eight years," said Rakshpal Abrol, president, Bombay Small Scale Industries Association, which has 4,600 individual members and 40 factory associations as its members.

“Since there is no council set up yet, we have nowhere to go to file complaints," he added.

And the law is silent on several important aspects, said Damodar Avanoor, vice-president, Kerala State Small Industries Association. “The Act explains how a respondent can go on appeal but lacks clarity on how an award can be executed."

Almost all SME associations that Mint spoke to said while cases of non-payment are rising, many people are hesitant to go on record for fear of being boycotted by companies. But a more serious problem, they maintain, is the lack of awareness about the law itself.

A sample survey of 250 small entrepreneurs conducted by Milagrow, a Noida-based firm that assists small businesses, shows that between 62% and 80% of the respondents didn’t know that a law exists to protect payment rights.

“The facilitation council (the complaints body) exists only in name, lacking both competence and manpower. Big companies have the clout of purchasing power. On the other hand, small players depend on their large customers, who constitute 60-70% of their revenue base so they rarely want to lodge a complaint," said Rajeev Karwal, Milagrow’s chief executive officer.

In states such as Kerala, about half the defaulters are government-owned companies; in Tamil Nadu, government firms account for 15% of defaulters. The number is a high 80% in the north-eastern states, said Ram Swaroop Joshi, chairman of Federation of Industries and Commerce of the North East Region.

Government-owned companies can get away with this, said Bhardwaj, because “the executive machinery in states, including the development commissioner, district magistrate and police, hesitate to take action against their fellow officers in public sector undertakings, even after judgements by facilitation councils".

SMEs that are brave enough to take on state-owned firms suffer the consequences.

A.V. Johnson, owner of an SME in Kerala, was forced to shut shop when several customers delayed payments. He was able to restart operations last year when the Kerala Road Transport Corp., one of the defaulters, paid a claim of Rs22 lakh. Since then, the state-owned firm has blacklisted him.

Rama Devi Kanneganti’s battle with a state-owned firm is far from over. The managing partner of Hyderabad-based Shivani Engineering Industries, which assembles buses, filed a case against the Andhra Pradesh State Road Transport Corp. over non-payment of dues running into a few crores of rupees.

Even before her complaint could be addressed, the corporation struck Shivani Engineering’s name off a list of authorized suppliers. Subsequently, Kanneganti, who also heads the Association of Lady Entrepreneurs of Andhra Pradesh, managed to get a favourable order from a state court allowing her to continue supplies to the corporation.

“It’s a vicious cycle," said Kanneganti over the phone from Hyderabad. “The government wants to encourage this sector through various schemes, but the implementation of the law is very poor. We need a mechanism where our grievances are addressed immediately."