Delayed Payment and its unrelenting demons

So what, if your payment is delayed a bit? Can’t one be patient and accept it in good faith? That may sound like a virtuous question to the uninitiated. But can those who are at the receiving end of delayed payments brazen it out, cloaked in patience and trust? Not when you are dealing with a problem with the size of a few lakh crores of rupees. And not when the delay in question stonewalls the growth of a sector that houses 99% of the business in India and may well sound the death knell for thousands of small players in the space.  

A preliminary estimate undertaken by GAME, Global Alliance for Mass Entrepreneurship, pegs the value of delayed payments due to MSME suppliers from large buyers in India to be of the order of trillions of rupees. A detailed report being worked on by GAME in partnership with Omidyar Network India (ONI) and Dun & Bradstreet India, slated to release at the end of April will unearth the full magnitude of the problem and its nature along with insights for possible solutions, but the devastating multiplier effect of Delayed Payments is already known too well. For those who subscribe to the adage that “justice delayed is justice denied”, payment delayed plays out as survival shaken, supply chains disrupted, trust shattered, and tax collections deferred. 

The effect and cause

According to the MSMED (Micro Small and Medium Enterprises Development) Act, 2006, buyers who source products or services from MSME suppliers are obligated to make payments within 45 days of the satisfactory delivery of the products or rendering of the service and will be liable to pay a hefty interest if payments are delayed beyond that period. This regulatory check notwithstanding, delayed payment remains so widespread across all verticals of the industry. In fact, it is so deeply entrenched in the system that most suppliers have come to accept it as a norm and live with it rather miserably. 

The obvious immediate impact of delayed payment on suppliers is that it drains their working capital. With commitments to meet the payment due to their own sub suppliers downstream and the need to run the operations uninterrupted, most of them resort to additional credit, often availed at exorbitant interest rates for their survival while investment in growth becomes next to impossible. It is ironic that the pending dues that the buyers sit on become their extended interest-free capital, even as those who are entitled to timely payment are further saddled by additional tax burden for their rightful working capital. Yet to bounce back from the perils of the pandemic, they may feel the heat more scorching than before. Considering that MSMEs account for 30% of national GDP, the overall impact of delayed payments is fathomable even unaccompanied by hard numbers. With growth stymied and daily survival made difficult, MSMEs that account for nearly 40% employment in the country would have started tamping down the employment, something that a country witnessing its highest unemployment rates in decades can’t afford.

The impact on the economy is further compounded if one factors in the attendant delay in tax collection when payments get delayed, not to forget how the supply chains as a whole will be disrupted when delays shake any one part of it.

Solutions on offer

Taking due cognisance of the criticality of the issue, multiple governmental interventions have been launched. The Samadhaan portal launched in 2017, saw the number of delayed payment applications filed by Micro and Small Enterprises (MSEs) alone cross 1 lakh mark this January, but 57.3% of them were still awaiting outcome. Add to it the fact that only a fraction of the payment delays may find their way to Samadhaan due to the bargaining power asymmetry between the financially enfeebled suppliers and their largely powerful buyers. So, even as the problem of Delayed Payments continue to rage, the resolution rates go southward for a number of reasons including procedural errors from the MSMEs, but the general apathy of large buyers both in public and private sectors, top it all.

TReDS, which offers invoice discounting as a solution for immediate disbursal of pending dues primary from corporate buyers also has seen only limited success despite the appeal of practicality that the mechanism rides on.

Given the mammoth size of the problem and its vexing complexity, it is evident that Delayed Payments would not be solved with well-designed legal remedies alone. Fixing procedural errors and ensuring fulfilment of commitment by all parties are fundamental. At the same time, the larger challenge rests in a mindset change and a moral commitment from the large, delinquent buyers to honour their regulatory obligation as well as play their larger role for the betterment of the economy.

To change the mindset towards a culture of commitment

That is the context in which ONI, GAME and D&B have come together not only to bring out a comprehensive research report on Delayed Payments to uncover the issue to its fullest possible clarity, but also to build a concerted campaign around it with the support of all stakeholders. The idea is to mainstream the issue and trigger a definitive shift towards solving it.

The campaign will pan out in three streams.

In the first, which gathers influential stakeholder voices around Delayed Payments will have a Prompt Payment Pledge (PPP) series taken by India’s exemplary corporate buyers who reiterate their ongoing commitment on video to pay their MSME suppliers promptly. This will overlap with a Voice of the Entrepreneur (VoE) series showcasing a representative group of entrepreneurs from across the country narrating their experiences with payment, how they deal with it when it gets delayed and instances of prompt payment that work well for everyone.

The second stream, which is meant to enlarge the attention to the problem will see a few in-depth articles examine Delayed Payments comprehensively, including insights from the research report and bring out the dimensions of buyers, suppliers, solution providers and regulatory mechanisms. This will also be complemented by a social media carousel that will let out compelling understanding of the problem one information byte at a time.

The third stream which will see the public launch of the Report, envisages wide ranging conversations with stakeholders including large buyers, MSME bodies, solution providers and governmental agencies and media to build advocacy and create momentum for longer-term engagements.

Scheduled to kick off by the end of March, the campaign with expanding participation from key players in the ecosystem is expected to be a definitive intervention with an impact that could go a long way in making prompt payment a trade norm to benefit the economy and catalyse it for tremendous growth.