The 45-Day Payment Rule: An Empowering Move For MSMEs Or A Catastrophic Event?

Micro, Small, and Medium Enterprises (MSMEs) are the backbone of the country, contributing 24.63% to the country's GDP. India has over 6.3 crore MSMEs, but only 15-20% of them have access to capital. This indicates that despite their critical role in India's economic development, they face challenges like access to credit and liquidity. Delay in payments is a significant roadblock for small businesses, which hinders their operations, cash flow, and expansion.

While the government has launched various schemes and policies to bolster their growth, the impact is gradual. Aiming to resolve their capital issues, the Finance Ministry announced Section 43B(H) in the Finance Act 2023. As per this rule, payments towards the goods supplied by MSMEs have to be cleared within 45 days. This policy comes as per provisions under Section 15 of the MSMED Act, 2006, and will be pivotal in ensuring prompt payments and relieving them of finance-related issues. Moreover, all dues must be cleared before March 31, 2024, failing which they will face tax penalties as the pending payment will be considered income.

The need for initiatives to reduce delayed payments for MSMEs

Timely payments can improve liquidity, build trust in business associations, and enable MSMEs to function seamlessly. Hence, reducing anomalies in payment processes can have a positive impact on their overall business landscape and unlock growth opportunities. The 45-day rule is expected to be a welcome move that will address the cash flow issue for small businesses. It has the potential to reduce their financial constraints and ensure prompt payments. The policy will further be instrumental in promoting fair business practices and bringing MSMEs at par with others in the business landscape. Several buyers have been following the rule for long and seem to be unaffected by the announcement. However, others are facing serious consequences.

Lukewarm response by the industry players

The move was intended to benefit MSMEs, but its immediate reaction so far has been lukewarm. It has caused disruptions in the market, and several small businesses are witnessing cancellations of orders. Some buyers are choosing to halt their purchases to ensure their payment timeline exceeds March 31.

The impact has been witnessed across industries. For instance, there is a 120-day credit period in the textile industry. Hence, the transition to 45 days has been tough and has led to cancellations of orders. Similarly, in the chemical sector, the credit period is 60 days. But the demand is less which usually leads to the extension of payment periods. With this new policy, they are resorting to MSMEs that are not registered with the Udyam portal so that they do not fall into the 45-day payment loop. Moreover, FMCG, apparel, and pharma companies are also in a fix as their credit cycles extend up to three to six months and complying with the 45-day rule will be cumbersome.

In some cases, buyers are even opting to conduct business with large enterprises, ending their associations with MSMEs. Additionally, several small businesses are even considering giving up their Udyam registrations to prevent loss of clients and business impact. However, Udyam registration is essential and should be made mandatory, just like Aadhar and GST.

Overcoming challenges to ensure stringent policy implementation

Despite this being a significant move, several challenges in implementation are also anticipated. Some of the small businesses might end up struggling to adapt to new payment terms, and this could lead to resistance or delays. Compliance across sectors and geographies can be an additional issue. We also cannot ignore the aspect that economic uncertainties can impact large entities and hinder prompt payments.

The rule has been prevalent since 2006, but neither MSMEs nor buyers were adhering to the policy. The announcement caused chaos, and various businesses are hoping for deferment by a full financial year, while others have requested an extension of the time limit. However, any changes to the rule can be made after the Union Budget announcement in July.

To ensure its compliance, the government's role will be integral. It should promote credit guarantee schemes and financial institutions to provide easy access to capital for MSMEs. Strategies like staying updated with local regulations, clearly outlining payment terms in contracts, automating payment processes, fostering effective vendor management, and conducting regular internal audits will go a long way toward the successful implementation of the 45-day rule.

It is also imperative that businesses address liquidity challenges, establish stringent internal procedures, and deploy new-age technologies to streamline financial transactions. Clear communication, legal training, and establishing escalation processes will help adhere to the new policy. A balance will have to be established between enforcing timely payments and maintaining a flexible environment to avoid associations with buyers turning sour. Leveraging technology and implementing robust digital invoicing and payment systems can further help small businesses streamline processes and reduce delays.

To conclude

The trade finance gap is high in India, and this directive aimed at clearing MSMEs' payments within a 45-day credit period will emerge as a game changer, empowering them and reducing inefficiencies in the entire ecosystem. The move intended to solve their cash flow problem could, in fact, lead to catastrophic outcomes as well. All in all, the new mandate is a step in the right direction and will help strengthen the position of MSMEs that usually operate in a CAPEX model, and payments are usually made later.

To overcome the ripple effect, stringent policy execution across sectors and period reviews can mitigate losses and build a nurturing ecosystem for MSMEs. Additionally, establishing concrete frameworks will encourage timely payments and periodic assessments and will be vital in adapting to the evolving economic landscape. In addition to this policy, fostering sustainable growth for MSMEs requires a multifaceted, holistic approach with efforts from all the involved stakeholders- the government, businesses, and financial institutions.