https://www.financialexpress.com/opinion/the-msme-payment-puzzle/3560121/
Clipped from: https://www.financialexpress.com/opinion/the-msme-payment-puzzle/3560121/
Services of information utility under IBC can help resolve issues of non-payment by corporates.
This is not just about delay. There is always a risk that a company may default on these payments to MSMEs.
By Debajyoti Ray Chaudhuri
According to a recent news report, the Union government is contemplating an extension of the non-performing asset classification period by banks for loans to micro, small, and medium enterprises (MSMEs), as these enterprises often struggle with receiving timely payments, leading to loan repayment defaults.
A similar attempt to ensure timely payment to MSMEs was made last year, when the Information Technology (IT) Act was amended. It provided that if a larger company does not pay an MSME within 45 days, it cannot deduct that expense from its taxable income. However, MSMEs themselves want this provision to be scrapped as they fear that larger corporates may look at alternative suppliers to come under this provision of the IT Act.
This is not just about delay. There is always a risk that a company may default on these payments to MSMEs. The Insolvency and Bankruptcy Code (IBC), 2016, has achieved success in the resolution of debts for banks and financial institutions; however, the recovery for suppliers, who are often MSMEs and classified as operational creditors (OCs), has usually been very low.
The IBC provides for an institution called an information utility (IU), which can facilitate recovery of MSME dues. Any creditor, including an MSME supplier, can submit information of its debt and subsequent default of it to the IU. On accepting such financial information, the IU relays it to the debtor who could be a corporate or non-corporate entity or even an individual. The debtor can accept or dispute the information. However, there is no obligation on the debtor to respond. The treatment of default is slightly different in that in case the debtor does not respond, the IU follows up with three reminders. If the debtor does not respond even after this, the IU communicates the information on default by email to all the creditors, who could be a consortium of banks providing credit facilities to the corporate debtor. This default broadcast is important. Most debtors would not be comfortable with their default to suppliers being reported to the banks, as this would be treated as incipient stress, leading to a reduction in credit rating and even restricting their ability to access further credit.
However, MSMEs have very little bargaining power when it comes to their large customers. It is often feared that reporting debt and/or default to the IU could lead to drying up of orders. This may not happen, as initially the information on default remains confidential between the supplier and customer, usually a large corporate. It is only when the large corporation does not pay after an intimation by the IU followed by three reminders that the information of default is broadcast to the other creditors. If the customer chooses to pay at any time before the completion of the process, the matter remains confidential. Moreover, if the MSME supplier remains quiet even after the dues from the large corporation keep increasing, it could lead to a situation where the entire amount becomes non-recoverable in case of default to all the creditors by the large corporation.
By reporting information of default to the IU, MSMEs would be performing an important responsibility in the ecosystem. Another supplier to the corporate who is already a user on the IU can see such a default and be forewarned of making further supplies.
An MSME supplier, before commencing supplies to a corporate customer, may also seek their consent to access credit history in the IU. The consent to access the information in the IU is easier to obtain when the relations are amicable and there is no default, but it can stand the MSME supplier in good stead later when there is default or delay in payment by the corporate. The default is often confidential, especially in the initial days, even if regulated institutions like banks have information of it.
Finally, after the broadcast of default by the IU, if the corporate still does not pay the MSME supplier the latter can obtain a record of default from the IU, which could help it initiate an application for corporate insolvency resolution process (CIRP) against its corporate customer. While it is true that the recovery for OCs is not substantial in most CIRPs, the threat of losing control as a consequence of the CIRP could bring the corporate to the negotiating table.
The role of the IU in facilitating MSME payments was recognised as early as in 2019, when the Expert Committee on MSMEs chaired by UK Sinha, former chairperson of the Securities and Exchange Board of India, recommended that the MSME Development Act should be amended to require the enterprises to mandatorily upload all their invoices above an amount to an IU. There was, however, an apprehension that this would increase the compliance burden on MSMEs. Accordingly, an alternative could be that data already reported to the SAMADHAN portal by the MSMEs could flow to the IU through secure application programming interfaces, and the IU would then take necessary steps as provided under the IBC.
The IBC is a potent tool and it has helped achieve debt resolution in some of the largest companies which were unable to repay debts to their lenders. However, initiating CIRP is not the only way in which the provisions of the IBC could be used.
The Insolvency and Bankruptcy Board of India website states that the IU as an institution has no parallel anywhere in the world. Its services can be availed to resolve the issues of non-payment by corporates to MSME suppliers. Moreover, there is no cut-off amount to avail the IU’s services, although to initiate CIRP against the corporate the amount of default must be more than `1 crore.
(The author is the MD & CEO of National E-Governance Services Limited. Views expressed are personal.)
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