Mint Explainer: India's MSMEs grapple with a ₹28,000 crore payment crisis—can a new portal fix it?

After passing the MSME Development Act in 2006, the government created a network of facilitation centres across the country, governed by states, to look into each of these cases and resolve them quickly.

Now, with the advent of online dispute resolution (ODR), the government has created a portal that brings together MSMEs that haven’t received payments for over 45 days, the businesses that owe them, and private-sector ODR service providers to resolve these disputes. This portal, inaugurated in June by President Droupadi Murmu, aims to resolve issues without involving the courts.

Mint explains the government's various attempts to tackle the issue over the years, why the ODR portal was created, and how it can help resolve disputes faster and cheaper and traditional methods.

What are delayed payments, and why should we care?

Often, MSMEs that supply goods or services to larger businesses and the government don’t receive the money they are owed on time despite holding up their end of the bargain. Payments that are late by more than 45 days are classified as ‘delayed’.

The Reserve Bank of India has studied delayed payments from the turn of the millennium to FY18, and estimated that it takes MSMEs 90 days on average to collect money from their debtors.

A buildup of receivables may look good on their balance sheets, but are no good in reality as these businesses depend on timely payments for their working capital.

MSMEs are the backbone of India’s consumption-driven economy. There were about 66.3 million such businesses in India as of 31 July, up from 59.3 million as of 4 February, and 31.6 million as of 4 December 2023, according to the government’s Udyam registration portal. They MSMEs contribute about a third of the country's gross value added (GVA) every year. Between April 2023 and May 2024, MSMEs accounted for over 45% of Indian exports. They employed more than 260 million people as of 12 March, or about a third of the country's total workforce, according to the Udyam portal.

How has the government tackled the issue?

In 2006, the government passed the MSME Development Act, a definitive and detailed law governing small businesses and their customers. Under this law, the government created a network of micro and small enterprise facilitation councils (MSEFCs), operated by state governments, which act as the first point of contact in delayed-payments cases.

There are currently 161 MSEFCs in India. MSMEs must file applications with these councils over delayed payments, and if found to have merit, they are taken up in courts or arbitration forums. However, these applications piled up quickly, causing the sector to demand more action from the government. So in 2017, the government created the MSME Samadhaan portal to monitor the operations of all MSEFCs. Monthly data from each of them would show businesses which councils were the most active and effective.

Then, with the advent of ODR services in the wake of the covid pandemic, the government decided to harness these for yet another dispute-resolution portal.to resolve delayed-payment disputes faster and cheaper, without involving courts.

Mint has previously written about the benefits of ODR for smaller businesses. For one, MSEFCs are sparsely located and businesses often need to travel to state capitals for relief. An online portal reduces these costs. It also does away with huge potential legal costs, and has a faceless application system with minimal documentation. The ODR system also allows for supervising whether deadlines are met.

How severe is the problem?

Since 2017, MSMEs have filed more than 250,000 applications with MSEFCs. About 73,000 of these were found to have no merit, and another 61,000 are yet to be taken up. More than 24,000 applications saw a mutual settlement without the need for MSEFC resources, and a little over 51,000 were resolved by MSEFCs.

In terms of value, MSEFCs currently have 97,000 delayed-payment cases (not applications) worth ₹28,000 crore, and though they have disposed of 51,000 cases, the value of these is only about ₹8,000 crore.

What are ODR service providers and how do they resolve disputes?

An ODR service provider is a company that uses digital technology and online platforms to resolve disputes between parties—such as through online mediation, online arbitration, or online negotiation—as an alternative to traditional court proceedings. These platforms offer a structured, cost-effective, and convenient way to settle conflicts ranging from e-commerce and consumer issues to contractual disputes and, of course, delayed-payment disputes.

India’s capital markets regulator, the Securities and Exchange Board of India (Sebi), has also started using ODR to resolve small-value disputes between investors and companies, or even stock exchanges. Small-value disputes is where ODR works best, according to service providers, while big-ticket disputes are usually resolved through arbitration and court cases, since a lot more money is at stake.

How does the MSME ODR portal work?

Though MSEFCs are allowed to delegate disputes to private-sector institutions if they feel the need to do so, they have refrained from doing so in many cases, despite businesses raising the alarm about the need to act quickly. Now, the MSME ODR portal brings both MSEFCs and ODR service providers together on the same platform.

But that’s where the change ends, since the procedure remains the same. Aggrieved parties must file an application on the portal before both parties to the dispute decide the way forward.

This process has two stages—the pre-MSEFC stage and the MSEFC stage. The pre-MSEFC stage comprises a 15- to 30-day negotiation period between parties, but they can choose to skip it and jump directly to the second stage.

The MSEFC stage is where the dispute is first mediated, and failing that, arbitrated. It is governed by the Mediation Act, 2023, and Arbitration & Conciliation Act, 1996. The Arbitration & Conciliation Act is currently undergoing reforms, one of which is amending the definition of arbitration to include online arbitration.

To date, all 161 MSEFCs and a few ODR service providers have been added to the portal, and a few hundred applications have been filed.