MSME Finance Issue – UPSC GS3

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Utility: Direct question can be asked. Content can be used in answers on Economy, Manufacturing, Unemployment, Covid.
MSME Finance Issue:
  • Micro, small and medium (MSME) enterprises are the backbone of a healthy and balanced economy.
  • They supply components, intermediate goods and services at competitive prices to big companies.
  • However, they receive delayed payments for their goods and services. It results in large portions of working capital being blocked.
  • This issue, coupled with often-inadequate credit at reasonable cost, leaves them financially unviable and unable to plan for growth.
Fact: As per a recent report, Unlocking Credit for India’s Job Creators, the total outstanding payments to be made to registered MSMEs by buyers in India could be about ₹15 trillion.
What are the government measures for MSMEs?
  • MSME Development Act of 2006 proposed guidelines for resolving the problem of delayed payments.
  • Factoring Regulation Act, 2011 helped codify the factoring business to address payment delays.
  • Emergency credit support measures have been announced and several compliance requirements have been temporarily relaxed.
  • Trade receivables discounting system (TReDS): 
    • TReDS was initiated by the Reserve Bank of India (RBI).
    • This unified platform facilitates the financing of trade receivables of MSMEs from corporate and other buyers.
    • TReDS provides easy access to funds at market-discovered rates of interest.
    • The MSME ministry has mandated the registry on the platform of companies with over ₹500 crore in turnover.
Suggestions
  • Jayant Sinha committee:
    • A standing committee on finance headed by Jayant Sinha has recommended integrating the TReDS platform with the GST network’s e-invoicing portal.
    • This would grant buyers and sellers access to e-invoices through a single window for factoring and also enhance competition and liquidity, reducing the price of factoring.
    • Apart from generating higher volumes of invoices, it would also be desirable to have more financers on these platforms.
  • More NBFC Involvement:
    • Non-banking financial companies (NBFCs), with their domain expertise in certain sectors, can easily digest the high risk of financing invoices from lower-rated firms.
    • However, an NBFC needs to have 50% of its total assets/income from the factoring business to register on TReDS as a ‘factor’.
    • Thus, government should allow more NBFCs to join the TReDS by amendments to Factoring Act.
  • U.K. Sinha committee:
    • U.K. Sinha committee recommended that a credit enhancement mechanism for extending guarantees to the invoices accepted by smaller/lower-rated corporates be evolved.
Many initiatives have been taken, however the issue of MSME finance gap persists. Thus, Industry associations and chambers of commerce must get their members to embrace a culture of payments to MSMEs on time.
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