- MSMEs suffer from payment delays by big companies as well as Public Sector
- A review of the policy to utilize the funds lying idle with SIDBI should be executed immediately
- An enabling ecosystem for MSMEs should be developed to identify real beneficiaries among MSMEs
The dire cash constraint in the Micro, Small and Medium Enterprises (MSMEs) sector has put the majority of MSMEs in a situation where they are unable to pay salaries to their employees for the month of April. As the country is already under month-long Lockdown due to the COVID19 pandemic, most of the industrial and business establishments are shutdown. In this scenario, small businesses are the worst hit.
One obvious question has been raised by many quarters over the insufficiency of funds of MSMEs to pay even one month of salary to their employees. However, a few factors and business scenarios in the lead up to the lockdown cannot be ignored while putting such an argument.
A major challenge the MSMEs face in the country is delayed payments from customers. As per the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, customers must make payments to MSMEs within 45 days. The rule mentions “the buyer is to make a payment on or before the date agreed on between him and the supplier in writing or, in case of no agreement, before the appointed day. The agreement between the seller and buyer shall not exceed more than 45 days.” However, the violation of this law by customers is rampant who does not make payments to small businesses in time causing financial trouble for the MSMEs.
And far as payment deferment is concerned, both the government departments, public sector undertakings, and big companies are an equally responsible contributor to the woes of MSMEs. Most of the big companies practice the exploitative approach as they not only defer payments to small businesses but also rope in new vendors. So, small businesses are always under pressure and fear of losing business.
Bank and financial institutions should be supportive and should increase their cash credit limits to the MSMEs by four times considering the most critical and immediate challenge of working capital for the MSMEs.
Small Industries Development Bank of India (SIDBI), which acts as the principal financial institution for the promotion, financing, and development of the MSMEs has also been the single biggest point of failure for SMEs. All the funds lying with SIDBI are not performing and not even disbursed. An immediate review of this policy should be made with the ground for a more professional intervention from the private sector.
Unlike big corporate companies, most of the MSMEs depend on their monthly payments and cash flows. Secondly, like big companies, MSMEs do not enjoy equal financial support from banks and financial institutions. Thirdly, MSMEs have already been under pressure before COVID- 19 outbreaks which have been aggravated during the lockdown. The crisis has brought the majority of small businesses to a survival crisis in the absence of adequate government support.
Finance Minister Nirmala Sitharaman announced on March 26 that the government would contribute 24 of the salary of employees whose salary is up to Rs.15,000 per month. The government contribution includes 12 percent of employer share and 12 percent of employee share. This scheme is meant for organizations with employee strength up to 100. However, the employees of these MSMEs under the purview of this scheme still do not stand to benefit from it as employees under 15000 salary brackets are covered under the EPF scheme and hence they need to undergo deduction.
Identification of MSMEs should be based on the annual turnover instead of an investment. The turnover based categorisation is transparent and in tune with the economic and technological changes.
The government does not have any existing system to identify all the deserving MSMEs as less than 10 percent of small businesses only are registered as MSMEs. A technology-based system should be developed to eliminate the problem of identification of all MSMEs in a transparent manner. We are sure that the Ministry of MSMEs during these COVID19 times, can frame necessary policy works to support the biggest employment providers in the country.