2 min read.Updated: 27 Jul 2021, 09:43 PM ISTLivemint
An amendment of law is set to ease norms and let non-specialist NBFCs into the business of buying unpaid bills. MSMEs under stress could encash their dues if this market kicks off
Even when it’s business as usual, micro, small and medium enterprises (MSMEs) find it hard to recover their dues from big companies. Unpaid invoices leave working capital held up that ought to go back into operations to accelerate rotations of cash and gain efficiency. In crunch times, such hold-ups can be so long as to force some MSMEs out of business, as was reported in the cashless shock of 2016 and then during last year’s pandemic lockdown that abruptly snapped supply chains off. In a move aimed at relief for stretched MSMEs in the aftermath of a second covid wave, the Lok Sabha on Monday passed the Factoring Regulation (Amendment) Bill, 2020, which liberalizes the business of factoring. A factor is a financial intermediary that acquires the receivables of a company—say, one unable to chase payments on its own—at a discount to their value, and then recovers whatever it can from all the billed entities. This nascent market for unpaid bills needed broader participation for small businesses to have the option of gaining solvency by selling off dues. Modifying an enactment of 2011 that gave this market its legal frame, the 2020 bill drops the need for a factor to report every transaction within 30 days, and also opens up the field to non-banking financial companies (NBFCs) that do not operate as specialized factors, defined as intermediaries with factoring accounting for more than half their assets and income. If new factors step in, volumes could rise to the rescue of many small units.
With more than 60 million MSMEs in the country, the scale of this crisis is large. By a recent broad estimate, small businesses in India are collectively owed ₹15 trillion. The future of several may be in jeopardy. Moves made in the past to address payment delays, such as a special funding scheme by Small Industries Development Bank of India and a device to impose interest charges on unpaid bills, did not result in substantive relief for MSMEs. As information technology now enables a lot more, what holds promise is our Trade Receivables Discounting System (TReDS), an online platform started by the Reserve Bank of India (RBI) in 2014. This gives MSMEs a window to offload receivables from private and public corporations as well as government departments through an auction mechanism, with financiers bidding for these. Despite efforts to promote its use, this RBI-regulated platform has been short of participants and its activity has been unimpressive. A wider pool of bills for discounting, analysts reckon, could stir up trading. To widen its catchment and ease linkages that can draw sellers and buyers in large enough numbers to assure TReDS of liquidity, a parliamentary panel headed by Lok Sabha member Jayant Sinha suggested that it be linked with the Goods and Services Tax Network’s e-invoices portal. The finance ministry has accepted this idea, but it will have to be done in a way that does not compromise anyone’s taxation privacy. It is also important that cyber safeguards are put in place and MSMEs reluctant to sell their bills are not badgered by unsolicited offers.
Designed appropriately, digital enablers of some kind may work in favour of all parties. For now, it would help MSMEs encash invoices if NBFCs with the requisite skills and tools of risk assessment get into the business of factoring. Discount rates need the stability of numbers before this market can prove itself useful. In theory, it can. Demand and supply need to meet. Let’s see it happen in practice.