MSMES make huge contributions to the country’s exports, GDP, and employment. Four fifths of the country’s employment sector are employed in MSMES. There are around 6.3 crore MSMEs in India, and 40 percent of them are involved in exports.Also, MSMEs contribute an enormous 30% to the country’s GDP. Although they add substantially to the country’s growth, they are severely affected by factors that hinder growth, ease of business, and flow of cash. India has a very poor payment culture. The pandemic has worsened this scenario further. B2B sectors are struggling with late payments, and the worst affected are MSMEs, since they have a very short period of time or no time at all to make up for the shortage in finance. This is due to the high cost of borrowing, lack of sources to borrow for MSMEs, and the absence of a strong credit rating. Although the government has passed laws stating that payments to MSMEs Loan should not be delayed beyond 45 days, defaulted payments continue to happen. MSMEs do not lodge complaints, since they fear that they will not get orders in the future if they do. So, let us read on to understand how India’s poor payment culture has impacted MSMEs.
The Culture of Late Payments
The MSME sector is showing very little growth over the last 2 years, due to the pandemic worsening the already rampant poor payment culture. Facts show that 60 percent of the SMEs in India receive payments from clients only after 60 days or more, and 35 percent get their dues only after 90 days or later. This uncertain nature of business and poor payment culture has broadened over the past 2 years due to the sudden shutdown of businesses because of lockdowns and other pandemic induced scenarios.
Insufficient Support from the Formal Sectors
MSMES do not get adequate support from formal financial sectors, such as banks and other traditional lending institutions. Reports suggest that although the financial growth of SMEs has been a priority, the sector lacks the necessary backing from the formal sectors of the country. So, they have to turn to informal lending institutions, which charge high interest rates, for monetary support. Due to the poor payment culture and lack of financial support, MSMEs have witnessed very little growth.
The Slow and Gradual Transition Towards Digitization
The economy in India is slowly adopting digitization and aiming to be a cashless economy. But still businesses in India, and that too especially the MSME sector relies heavily on cash. They are yet to adopt the use of technology and digitization to manage their payments and billing cycles. The plan towards developing a cashless society seems to be ineffective, as RBI data shows that cash transactions in India are steadily rising.
Inaccurate Transaction Data
MSMEs have still not adopted and adapted to the use of technology and digitization to transact. Cash is mostly the way to do business for this sector. They face challenges in analyzing, maintaining, and accessing data. A considerable amount of payments and deals are done through cash for MSMEs, and most of the transactions remain unaccounted. They are entered with flaws and delays. Inaccurate accounting information and unorganized data collection are one of the major reasons for missing out on payments.
The Failure to Identify Credit Risks
The poor payment culture in India is the result of a lack of understanding of credit
scores and credit risks. Frequent defaulters continue to obtain credit even if their credit score is poor. This is because trust and influence are some of the main factors on which certain sectors in India operate. The MSME sector is one of them, and they offer credit to clients even without analyzing their credit history. They fail to comprehend and assess the repayment capacity of the customer. They do not think on the lines of whether the customer will repay the correct amount within time. MSMEs should understand that doing business based on credit history and credit scores will reduce financial risks for their businesses. Before striking a business deal or before offering credit, the MSME has to be aware of the credit history of the entity. This will eliminate the odds of non-payment and increase growth opportunities for the MSMEs.
The discussions above will give you a fundamental understanding of How India’s Poor Payment Culture Has Impacted MSMEs. The MSME sector has been heavily impacted by the poor payment culture in India. There must be new legislation in place to make sure that payment defaults do not occur. Also, financial awareness should be imparted to eliminate this poor payment culture. Curbing this poor payment culture will ease out the pressure on the financial front for MSMEs and help them conduct transactions in a better way.