During the pre-budget consultations with union finance minister Nirmala Sitharaman, PHD Chamber of Commerce and Industry (PHDCCI) has urged the central government to change in classification norms of micro, small and medium enterprises (MSMEs) for non-performing assets (NPAs) from the 90 days limit to 180 days.
It stated that boosting the MSME sector is crucial for India’s economic growth and the government should change the classification Norms of MSMEs for NPAs and restructure the scheme for MSMEs approved by the Reserve Bank of India (RBI), from the 90 days limit for classifying over dues of MSMEs to 180 days.
Moreover, MSME Facilitation councils should cover medium enterprises also, for settlement of delayed payments from the buyers with the provision of payments within a maximum of 45 days if there is no specified payment date in the purchase order.
Notably, the Modi government's 45-day payment rule sparked widespread concerns among Indian MSMEs, particularly those in the textile industry, who fear that the implementation of this new rule could affect their relationships with suppliers and buyers, who frequently operate on a credit basis with these small enterprises. Additionally, others express apprehension that their existing systems may not be adequately prepared to accommodate this provision.
According to media reports, the finance ministry is reportedly considering a deferment of the enforcement of Rule 43B (h) under the Income Tax Act, which mandates payments to MSMEs within 45 days and the proposed postponement is likely to extend for an entire financial year, with the rule expected to come into effect from 1 April 2025.
The PHDCCI stated that the working cycle of MSMEs in a large number of cases extends much beyond 90 day period as from the date of purchase of raw materials till the date of making sales itself spreads over a period of 90 days and thereafter, it takes another 30 to 90 days to realise the bills and receivables. Hence, the working capital cycle of MSMEs keeps prolonging due to delays in the realisation of their bills/receivables.
Due to such delays which have become a general business practice now, MSMEs find it extremely difficult to service their debt instalments or interest obligations in time, as a result of which, many of them default and their dues become irregular and overdue leading to their classification into NPAs. There is a need to reconsider the provision of 90 90-day limits for classifying their over dues into NPAs.
The industry body also recommended that the 90 days limit fixed by RBI for classifying over dues of MSMEs should be increased to 180 days so that MSMEs are not constrained to divert their working capital towards servicing of their loan-instalments and clearing of their over dues at the cost of their normal business operations.
“This improvement in the RBI guidelines will save a large number of MSMEs from turning sick or getting closed resulting in loss of economic activity and loss of employment, and further preventing avoidable classification of bad debts and unwarranted litigation by banks thereby saving the banks from losses,” it added.
According to a report by the GAME, delayed payments have surged to unprecedented levels, amounting to 10.7 lakh crore, approximately 7.8 per cent of the GDP. Effective implementation of the rule holds the potential to significantly ameliorate the cash flow challenges faced by MSMEs, empowering them to invest, expand, and make greater contributions to the economy. Moreover, enhanced clarity and stringent enforcement can foster transparency and accountability in business transactions, fostering a fairer marketplace.
Restructuring Scheme For MSMEs Approved By RBI
The RBI had provided a framework to banks & lending institutions for the implementation of restructuring plans for addressing the economic fallout due to the Covid-19 pandemic for the accounts with aggregate exposure, including non-fund-based facilities, of banks and NBFCs not exceeding Rs 25 crore as on 1 March 2020. This facility was however restricted to those MSMEs which were classified as standard on 31 March 2020.
On May 05, 2021, the central bank decided to extend the restructuring facility 2.0 with an increase in limit to Rs 50 crore, for those MSMEs which were classified as standard on 31 March 2021. With the repayment of the Emergency Line of Credit having started, many MSMEs are facing difficulty in meeting their repayment commitments.
“It is, therefore, recommended that the eligibility criteria for being eligible for restructuring 2.0 should be amended to include all those MSME accounts which have become overdue and/or NPAs after the first wave of Covid started in March 2020 with cut of date of 31 March 2020, so that accounts of such MSMEs can be regularized and they can continue to function without interruptions,” it added.
More From Industry Bodies
To strengthen India’s journey towards Viksit Bharat (developed India), industry bodies such as PHDCCI, the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Associated Chambers of Commerce and Industry of India (Assocham) interacted with Sitharaman on pre-budget suggestions.
Assocham has suggested that the government should focus on MSMEs as there is a pressing need to establish a dedicated working group tasked with identifying underperforming schemes related to MSMEs. Such an initiative would systematically assess the effectiveness of current programs, pinpointing areas where interventions are falling short in supporting MSMEs.
Sanjay Nayar, President, Assocham said, “By conducting thorough evaluations and gathering empirical data, this group can recommend targeted reforms or adjustments to policies, ensuring that government initiatives align closely with the evolving needs and challenges faced by MSMEs.” The Assocham pre-budget presentation also suggested the establishment of MSME universities across the country. Such moves would boost employment generation through MSMEs while enhancing entrepreneurship in the country.
''There is a compelling need to establish MSME universities with specialised courses and training programs aimed at enhancing the competitiveness of SMEs on a global scale These universities would serve as hubs of knowledge and innovation, equipping MSMEs with essential skills in areas such as technology adoption, financial management, quality management, market strategy, and compliance with international regulations," the President said.
Another industry body FICCI urged the government to revise the qualifying turnover criterion for mandatory registration of companies on the Trade Receivables Discounting System (TReDS) platform to more than Rs 250 crore from Rs 500 crore currently.
Every tax invoice raised by GST registered MSME unit should reflect automatically on the respective TReDS platform where the MSME unit is registered. Such invoices are to be made deemed accepted and made available for Financial Institutions to provide funds to MSMEs, it mentioned. FICCI added, “Leverage Account Aggregator framework for MSME lending by reviewing the legal and compliance issues that prevent joint and corporate accounts from the scope of AA.”
The RBI had launched a scheme called TReDS to facilitate the discounting of invoices and bills of exchange of MSME suppliers. The process of TReDS involves uploading of invoices and bills by MSMEs for discounting by converting them into factoring units which have to be accepted by corporate buyers before their discounting can take place by financiers who will then receive their payments from the bank of corporate buyers.
PHDCCI stated that very few MSME suppliers have been able to avail of the facility of TReDS due to the lengthy process involved. It is therefore recommended that certain concessions to PSUs/ large companies who join TReDS be considered. For example– they can be allowed additional funding by banks to the extent of 50 per cent of MSMEs' annual purchases and all companies with annual turnover exceeding 250 crores should be advised to register on TReDS platforms to improve the quicker realisation of dues of the MSMEs.
Since its inception, the volume of invoice discounting facilitated by TReDS has sparked discussions among industry insiders as many believe that this platform has failed to create meaningful volumes of invoice discounting. While describing the drawbacks of TReDS, experts said that MSME suppliers' identity is a major concern for big companies as they believe that their competitors will be able to find out from where they source their materials. Apart from that large corporations prioritise providing lengthier credit terms to their suppliers and will not recover receivables within 45 days.
Last year, the centre's public policy think-tank Niti Ayog in its report stated that while TReDS was “sound in theory as observed by the U K Sinha Committee, it failed to take off and establish a meaningful volume of invoice discounting.” It stated that the shallow pools of financing capital and lack of corporate buyer incentives as the major reasons behind the slow growth.
Modi government has mandated that all companies with a turnover of Rs 500 crore and above should register on the TReDS platform, but there are various reasons for corporates not being interested in utilising the TReDS facility. There is a lack of any incentive for the corporate buyers to join TReDS and secondly, many corporate buyers already have their corporate treasury departments that operate their own reverse factoring programs for their supplier ecosystem.
In a written reply in the Lok Sabha, Bhagwat Karad, minister of state in the finance ministry in March stated that TReDS has financed about 54.56 lakh invoices till February 2023 and the amount involved in invoices discounted was at Rs 1.42 lakh crore.
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