Whalesbook
Micro, Small, and Medium Enterprises (MSMEs) in India are facing a significant financial challenge due to delayed payments totaling Rs 7.34 lakh crore as of March 2024. Public sector entities are major contributors to this debt, owing almost 40% of the outstanding amount.
This persistent issue of delayed payments, though reduced from peaks of Rs 10.7 lakh crore in 2022, continues to be a major hurdle for India's 6.4 crore MSMEs, which are vital to the country's Gross Value Added (GVA) and economic growth. The Global Alliance for Mass Entrepreneurship (GAME), Federation of Indian Micro and Small & Medium Enterprises (FISME), and C2FO have highlighted these challenges in their 'Delayed Payments Report 3.0'.
Key Figures on Delayed Payments
- The total quantum of delayed payments to MSMEs stood at Rs 7.34 lakh crore in March 2024.
- This figure is down from Rs 8.27 lakh crore in 2023 and a peak estimate of Rs 10.7 lakh crore in 2022.
- Public sector undertakings, central and state-owned, are responsible for nearly 40% of these outstanding payments.
Challenges for MSMEs
- Delayed payments significantly constrain working capital and access to credit for MSMEs.
- Procurement processes often lack transparency, making it hard for MSMEs to understand tender criteria and bid requirements.
- An overly complex participation process acts as a severe barrier to MSMEs entering public procurement tenders.
- A mandatory three-year PSU experience requirement for government tenders disadvantages new entrepreneurs.
Government and Financial Sector Response
- The government has increased lending targets for scheduled commercial banks and Non-Banking Financial Companies (NBFCs) to MSMEs.
- The target for credit flow is Rs 5.75 lakh crore for 2024-25, rising to Rs 6.21 lakh crore for 2025-26 and Rs 7 lakh crore for 2026-27.
- Outstanding loans to MSMEs have seen growth: 9.2% in public sector banks, 25% in private banks, and 39% in NBFCs over the last two financial years.
- Mudra loans to MSMEs grew by 20.1% year-on-year in FY24.
Loan Performance
- Public sector banks reported 3.4% Non-Performing Assets (NPAs) on Mudra loans.
- Private sector banks reported significantly lower NPAs at 0.95% on Mudra loans.
Impact
- The persistence of delayed payments, especially from public sector entities, continues to threaten the financial stability and growth of a vast number of MSMEs, which form the backbone of the Indian economy.
- Improved credit flow targets aim to alleviate working capital shortages, but structural issues in procurement and payment cycles need continuous attention.
- Impact Rating (0-10): 8
Difficult Terms Explained
- MSMEs: Micro, Small, and Medium Enterprises. These are businesses categorized based on their investment in plant and machinery or equipment, and their annual turnover.
- Public Sector Undertakings (PSUs): Government-owned companies operating in various sectors.
- Samadhaan: A government portal designed to monitor and resolve delayed payments to Micro and Small Enterprises.
- GVA: Gross Value Added. It measures the contribution to GDP by all groups of producers in an economy.
- Working Capital: The difference between current assets and current liabilities; it represents the funds available for day-to-day operations.
- NBFCs: Non-Banking Financial Companies. These are financial institutions that provide banking-like services but do not hold a banking license.
- NPAs: Non-Performing Assets. Loans or advances where the principal or interest payment remains overdue for a specified period (typically 90 days).