My numerous interactions with the small traders and
manufacturers in past couple of years have highlighted "working capital
stress" as one of the key challenge being faced by this key segment of the
Indian economy.
Traditionally, this segment had managed their working capital
through informal sources. Private pools (popularly known as kitty or committee
in local parlance) functioned as economical, stable and sustainable mechanism
to fund working capital and small capex needs. Besides, it also helped in
providing a large pool of "free" working capital to large corporate
buyers.
The process of demonetization in 2016 disrupted this traditional
financing mechanism, without offering any alternative solution. This disruption
not only impacted the MSME segment, but did also hurt the larger businesses
which replied on these MSME as a major source of working capital financing and
inventory parking.
In recent past, many government officials and ministers have
denied the problem of "delayed payments" and "poor credit
availability" to the MSME segment, even though the finance minister has on
at least three occasions in past one year promised that all pending payments to
the MSME due from government departments and PSUs will be expeditiously
cleared. However, no significant delivery on this promise has been seen on the
gorund.
Last week, the RBI governor while delivering a lecture at the
15th ASSOCHEM Annual Banking Summit, on the subject "Micro, Small and
Medium Enterprises: Challenges and Way Forward" highlighted this problem.
Recognizing the importance of MSME in the overall economic context, the
governor said as follows:
1. The MSME sector
contributes in a significant way to the growth of the Indian economy with a
vast network of about 6.3 crore units and a share of around 30 per cent in
nominal GDP in 2016-17. The share of the sector in total manufacturing output
was even higher at 45 per cent. Taking cognizance of the wider set of benefits
that the sector offers to the rest of the economy, the Government has
envisioned to increase its contribution to GDP to over 50 per cent in next few
years as the country aspires for a ₹ 5 trillion economy."
2. As per the 73rd round
of National Sample Survey (NSS) conducted during the period 2015-16, the
estimated employment in MSME sector was around 11 crore. Within MSME sector,
each of the three sub-sectors, namely, trade, manufacturing and other services
accounted for about a third of total employment. Around 50 per cent of the
total MSMEs operate in rural areas and provide 45 per cent of total employment.
Interestingly, the micro enterprises account for 97 per cent of
total employment in MSME sector. This relates to the problem of what is called
the missing middle5,
which suggests that micro firms have failed to grow into smaller and medium
firms and so on over time. This seems to have kept the micro sector bereft of
enjoying economies of scale, investment into fixed assets, adoption of
technology and innovation.
While counting the challenges for this critical segment of
Indian economy, the governor admitted that "delayed payments" is one
of the primary challenges being faced by the sector. The governor said, "A
large number of MSMEs are ancillary units catering to the needs of large
industries, both in the public and private sector. They often face the problem
of delayed payments, affecting their cash flow and working capital
availability. Most of the time, delay in realisation of such receivables
increases their operating cycle and reduces their ability to procure new orders
or fulfil the existing ones. A primary survey conducted by Reserve Bank in
December 2019 showed that 44 per cent of MSMEs engaged in manufacturing
activities faced delay in payments."
The governor mentioned that Trade Receivables Discounting System
(TReDS) launched in 2014, could be a sustainable solution for meeting the
working capital needs of MSME as well as managing the delayed payment issues.
TReDS is primarily an auction based bill discounting platform introduced by
RBI. Besides, in the Union Budget 2020-21, the Government has also announced
app-based invoice financing products to obviate the problem of delayed payments
of MSME. The mechanism may prove complementary to the TReDS platform and would
further alleviate the problem of delayed payments.
However, we are yet to see these measures becoming popular with
the MSEM and the large corporate and PSUs.
TReDS when (and if) fully adopted, could be a game changing
platform in Indian financial services industry. For, it could (a) provide
seamless bill discounting facility to MSEM at the most competitive rates, (b)
provide a well diversified and cost effective platform to financiers; (c)
instill a sense of payment discipline amongst large corporates and PSUs; and
(d) help identifying the sign of stress in the corporate buyers at a very early
stage, prompting a fast corrective action.
The question is whether all stakeholders are making sufficient
efforts to make this happen?
Outstanding blog with lots of information. Keep posting more like this.
ReplyDeleteccna course in Chennai
ccna institute in Chennai
ccna Training in Chennai
ccna training institute in bangalore
ccna course in marathahalli
Ethical Hacking course in Chennai
PHP Training in Chennai
Salesforce Training in Chennai
CCNA course in Anna Nagar