India’s small businesses are getting crushed under a mountain of receivables

The woes related to delayed receivables are an add-on to the slew of headwinds that small companies already face.  (Photo: PTI)
The woes related to delayed receivables are an add-on to the slew of headwinds that small companies already face. (Photo: PTI)


  • By one estimate, India’s small enterprises are owed 15 trillion in outstanding dues. Is there a solution?
  • Many companies borrow from informal sources at high interest rates in order to meet immediate working capital needs. Since they have to keep borrowing, it’s a cycle of perpetual debt

Alouk Kumar shows up over a video call from his office in Noida. Behind his work desk is a board with a distinctive message pinned on an A4-sized sheet: “Think big. Keep re-inventing". These days, he isn’t able to do either of those things.

In 2019, Inductus Ltd, his consulting company, worked on the implementation of a project run by a large engineering firm for over a month. Inductus deployed 20 people at different sites and when the project was finished, the firm raised an invoice of 1.5 crore. Cut to 2021, the payment remains pending.

Every time Kumar nudges his customer’s procurement team, he is offered a new reason for the delay: “Our offices are closed"; “Our employees can’t access (the) payments portal remotely"; “We have a shortage of employees".

The last time he checked, the customer had apparently made changes to its vendor portal and now, there was a new process in place for approvals. More than a year after his company completed the project, Kumar has to upload all the bills afresh, along with new documents. “I am convinced big corporates are devising new strategies to delay payments," he said. “A change in the billing process means that it’s another long cycle of 90 days to get paid."

The outstanding amount of 1.5 crore is just a small fraction of the overall dues that Inductus is owed by various entities—both private and government. “We are a 50 crore company (in terms of annual revenue), and we have an outstanding of 20 crore now," Kumar said. “Forget making investments and thinking about growth… Our survival is at stake."

This is broadly the narrative that one hears from micro, small and medium enterprises (MSMEs) in the country. In India, ‘micro’ companies are classified as those with a turnover of less than 5 crore. The small have a turnover that is less than 50 crore, while the medium enterprises are those below 250 crore.

While the buyers are legally mandated to make payments to a supplier within 45 days of accepting goods or services, the on-ground reality is frightfully different for small firms. And the pandemic has only made a bad situation even worse. Depending on the size of the small enterprise, the payments cycle—from the time an MSME receives a purchase order to the time they get paid—could vary between 90 to 180 days. In other words, their working capital is blocked for half the year, inhibiting the ability of these companies to scale up—one reason why India’s small firms tend to remain small.

Many companies borrow from informal sources at high interest rates in order to meet immediate working capital needs. Since they have to keep borrowing, it’s a cycle of perpetual debt. The Global Alliance for Mass Entrepreneurship (GAME), an organization that works on entrepreneurship development in India, has come up with an estimate to quantify the scale of the problem. Based on consolidated data for FY2019-20 (data for the recent fiscal year is still not fully available), registered MSMEs were awaiting dues that amounted to a mammoth 15 trillion.

Since these projections are based on available data that dates back to the early days of the pandemic, what happened once the full impact of covid hit is anyone’s guess.

The woes related to delayed receivables are an add-on to the slew of headwinds that small firms already face in the context of demand-side disruptions wrought by the pandemic and subsequent lockdowns.

“MSMEs were the least equipped to deal with the impact of the pandemic. Even before the pandemic, several of them did not have adequate access to finance, markets, or electricity," Sabina Dewan, founder and executive director of the JustJobs Network, a think-tank, said. “Now, with the economic shock of lockdowns and a collapse in demand, these businesses, if they survive at all, are struggling to retain and pay their workers," she added.

Policymakers, time and again, have asserted the importance of MSMEs to India’s economy. According to figures shared in the Lok Sabha by the Union minister for micro, small and medium enterprises Nitin Gadkari, the share of MSME-related products in overall exports is around 48-49% for the last four years. MSME’s share in gross value added (GVA) is around 31-32%. An estimated 111 million people are employed by 63 million of these firms. However, all the assertions about MSMEs being the future growth engines are likely to fall flat if they keep slipping into the quagmire of delayed payments. What is at the heart of the problem and why would a large corporate firm even delay dues to the small supplier?

Tilted power

The managing director of a small manufacturing firm that supplies components to telecom and critical infrastructure public sector units prefers to remain anonymous. But he vociferously declares that his payment cycle has doubled compared to pre-covid months.

“My outstanding is over 30% of revenues. The biggest challenge is cash flow, not orders," he said. “To survive, we are borrowing from private sources. I am also contemplating selling off one of our plants in Roorkee," he added.

Like Inductus’ Alouk Kumar, he too believes in “gentle nudges" when it comes to dealing with customers in the public sector. “I can only push them so much," he said. “They can blacklist you from participating in any further tenders. They can dispute the invoice amount and reduce it. These tools have been used rampantly," he explained.

This does explain why so few cases end up getting reported on the Indian government’s delayed payments monitoring system—MSME Samadhaan. Any small company can file an application against a buyer for non-payment of dues; the applications are reviewed by a council before it can be settled. Only 80,983 applications have been filed by MSMEs thus far on the portal, with disputes totalling 21,984 crore as of 5 July this year.

At the heart of this is a skewed balance of power—a mismatch between the large buyers’ cash flow priorities and the MSME’s cash flow needs. “The large buyers are making a judgement call about their need to show better cash flows. One way to squeeze that number out is by delaying payments to MSME suppliers," Ashwin Chandrasekhar, a vice president at GAME, said. “MSMEs don’t have bargaining power. The small company risks losing the buyer who could be 30-40% of their revenues."

Ketan Gaikwad, managing director and CEO of Receivables Exchange of India Ltd (RXIL), held that some corporates, particularly the public sector undertakings (PSUs), still have a patronizing attitude. “The files keep moving within a PSU for six months. It’s about harassing the MSME… getting your ‘speed money’. Transparency is something that PSUs don’t want," he said.

RXIL operates the Trade Receivables Discounting System (TReDS), a platform that provides an option to MSMEs to discount invoices and raise short-term credit from the banks to tide over any delays in payment. There are three participants on the platform—the buyer, the seller and the financier. MSMEs auction their trade receivables through an online bidding process and the bids are based on the credit rating of the buyer, not the small supplier.

The platform today has 650 corporates. “Most people transacting on our platform are private corporates," Gaikwad said. “PSUs are still hoodwinking and not coming onto the platform. Even when they are on the platform, they are not doing the transactions," he added.

The Union government says that it has been clearing the dues of central PSUs but can do little when it comes to state PSUs. Responding to a question in the Lok Sabha in February, minister of state for finance, Anurag Singh Thakur, said that the Centre has taken up the delayed payments issue “vigorously" with the central ministries, central public sector enterprises, state governments and corporate entities. “But it is to be noted that the central government cannot issue any directions to, or force, state governments or state PSEs (public sector enterprises) to pay the dues," he said.

Post-invoice fixes

Kamlesh Joshi learnt a hard lesson after supplying to Essar Steel. His firm, Code Tech Solutions, sources industrial printers and related products, such as ink, and supplies them to firms in the steel, food, and pharma sectors. His payment got held up after Essar Steel ran out of money. “The company went into bankruptcy and a huge amount was pending for nearly two years. Now, I don’t have that tension," he said. In 2019, ArcelorMittal, one of the world’s largest steelmakers, acquired Essar Steel after forming a joint venture with Nippon Steel. ArcelorMittal nudged Joshi to get onto the TReDS platform.

“We started using TReDS in September 2020. It is working well for me," Joshi said. “The benefit is that I don’t have to go for working capital loans. The customer takes around 10 days to process the invoice and in the next two days, we get the payment. So, we have the liquidity in 12 days," he added. On TReDS, the credit Joshi receives has an interest rate of about 6-7%. A working capital loan would have cost him 8-8.5%.

But there is a catch: TReDS works well till such time MSMEs have their larger buyers on the platform. Secondly, and more importantly, the large buyers should be willing to accept the invoice on time. Joshi has 65 customers; only Arcelor Mittal among them is on TReDS.

“One of the failings is that you need buyer approval on the invoice to be able to get the invoice discounted on TReDS. Now, many buyers are not approving the invoices," Ashwin Chandrasekhar of GAME said. “To solve this, a range of incentive structures are being discussed. The second solution is a window on TReDS that has nothing to do with the buyer. An invoice can be validated through a third-party system like GST," he suggested.

The good news is that a range of fintech companies have entered the post-invoice financing space in recent years. One of these companies is Cashinvoice, a company that offers early payments against an accepted invoice. The company ties up with large corporates and then finances their supply chain.

“Typically, recourse and documentation were always on the MSME. We put the onus onto the corporate buyer. The buyer has to pay up in case of default," said Shrinivas Kasar, co-founder and chief operating officer of Cashinvoice.

Just-in-time money

What Kasar says is in vogue at the moment. MSMEs are difficult to underwrite since many of them won’t even have three years of income tax returns or such documents that a bank might expect. As a result, lending in the space relied on informal channels. But if the large corporate buyer can underwrite the credit, the risk shifts away from the MSME, and formal financial institutions can step in.

CredAble, a firm founded in 2017, is trying to evangelize a collateral-free, just-in-time payments model. It is a pre-invoice solution because getting the invoice accepted is a time-consuming process. “Pre-invoice financing is a much bigger problem because unless the MSMEs get the capital when they need it the most, you are not going to solve the growth problem," Nirav Choksi, co-founder and CEO of CredAble, said.

So, how does pre-invoice financing work? The firm identifies “billable events" prior to an invoice being generated. When an apparel manufacturer supplies to a large retailer, for instance, it receives a goods received note, or GRN. CredAble can finance a percentage of the GRN value upfront. However, the million-dollar question is this: Why would large buyers, who have largely benefitted from the status quo, begin to underwrite their supply chain now? Choksi has a ready answer—the pandemic’s disruption of supply chains has woken up big corporates. In instances where business continuity depends on a small supplier, it is in the corporate firm’s interests to improve the supplier’s financial viability to ensure a stable supply chain. CredAble is disbursing 1,500 crore a month now. A year ago, it was disbursing 100 crore. About 25% of the amount currently disbursed is pre-invoice financing. “We are on track to disburse 2,500 crore (a month) by September this year. It shows how corporates have realized they can’t do without strengthening the financial liquidity of the ecosystem," he said.

The mass migration of workers and the months when select raw materials were in short supply have been a wake-up call for many firms. At least the large private manufacturers, which operate complex and multi-tiered operations, have realized that stability in the supply chain is an imperative—the chain is only as strong as the weakest link and the weakest link, often, is the micro enterprise.

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