5th April 2024: India’s recent introduction of a 45-day MSME policy aims to tackle the persistent problem of delayed payments and enhance the productivity of micro, small, and medium enterprises (MSMEs). However, for MSME exporters, this regulation presents a dual scenario, offering potential opportunities for growth while also posing certain challenges to navigate.
On the positive side, these regulations enhance financial management practices and bolster the competitiveness of MSME exporters in the global economy. Timely payments empower suppliers to invest in expansion initiatives and broaden their market presence. Additionally, fostering timely payments fosters trust and cultivates enduring partnerships with buyers, laying a foundation for sustained cooperation and mutual benefit.
However, adherence to these regulations necessitates alignment with established business processes, potentially increasing the administrative burden on management. Implementing a robust quality control system and proactive feedback mechanism becomes imperative for navigating these challenges and ensuring successful compliance.
Srivatsan Sridhar, Founder and CEO of Skydo, a cross-border payments platform made a comment on this topic while he says: –
The government has implemented a rule that mandates large companies to make payments to their MSME suppliers within 45-days, failing which those payments cannot be considered part of their expenses. This implies they will have to pay taxes on that amount which can only be claimed once the payments are made. With this rule, the government is trying to ensure better cash flow for MSMEs who perennially struggle with delayed payments from larger customers which makes their cash flow positions difficult even as they struggle to win orders, execute projects and manage their business, often with very thin profit margins. This is also intended to induce larger companies to demonstrate better fiscal and cash flow management responsibility. While the intent of the rule is beneficial to MSMEs and the broader ecosystem, its implementation may face challenges.
In sectors with long supply chains and lead times, especially those in manufacturing and exporting sectors, adhering to a 45-day payment window may significantly impact companies’ working capital. Presently, domestic payment terms typically are 90 days, while international cycles can stretch to over 150 days. The logistics involved in international shipping often result in extended transit times, with goods taking weeks to reach their destination.
Additionally, overseas customers often force suppliers to store inventory nearby, in warding parts into their company only on demand – these further delays payment due date recognition. The introduction of a 45-day payment rule may end up creating a few unintended challenges for MSMEs – large companies renegotiating contracts with their suppliers, forcing MSMEs to accept lower margins or absorb additional costs of complying with the rule, replacing existing suppliers with new ones, re-defining the payment event in myriad ways to circumvent the 45-day rule, and so on. There are also multiple question marks on the enforceability of this rule. The Trade receivables electronics discounting system (TReDS) launched by RBI recently might come in as a saviors for MSMEs – this enables them to get competitive discounting rates to receive their invoice payments quickly, and this new 45-day payment rule might help this scheme see widespread adoption.
