In an online discussion with industry bodies and leaders, the Minister of Commerce and Industry, Mr. Piyush Goyal appealed to the public and private entities to ‘prepay’ their MSME (Micro, Small and Medium Enterprises) vendors and sellers for their supply of goods and services. Advance payment to these MSMEs would increase their growth, promote employment, and secure their viability, according to the Minister.
Mr. Goyal was speaking with the heads of top corporates and industry associations at a virtual meeting held on Wednesday, 12 January in New Delhi. He also sought counsel on ways to ensure “the continuation of fast rebound of economic activities and high growth rates being achieved.” He further applauded the industry for its quick recovery from the adverse effects of the pandemic and also commended them on their adaptability in dealing with the COVID pandemic, especially in the field of exports.
What is Prepay?
‘Prepay’ is a method to provide capital-starved MSMEs with credit for their services and goods on or before time by financially strong corporates and enterprises.
The Ministry for Micro, Small, and Medium Enterprises had also written to 500 corporates in September 2020 and to 2,800 Enterprises in October to clear their pending payments to MSMEs.
Prepay or advance payment of dues holds greater importance at a time when government data has shown that applications related to delayed payments filed by MSMEs have crossed over 1 lakh which involves a whopping amount of ₹26,210.86 crore. The number of applications has reached 1,00,203 since the launch of MSME Samadhaan, a delayed payment monitoring portal, by the government on October 30, 2017.
However, only 12 percent of these cases were disposed of by MSE Facilitation Councils (MSEFCs). Interestingly, the data showed that the applications were filed against central ministries, central departments, central public sector units (PSUs), railway zone, railway division, ordnance factory, state government and PSUs, MSME units, individuals, proprietorships, and others.
How will this help MSMEs?
The MSME sector, despite being a major contributor to India’s GDP and employment, is still the most at risk to factors that disrupt cash flow, growth, and ease of doing business.
Delayed payments and getting dues cleared on time is a major issue faced by MSMEs that hinders their growth.
Currently, MSMEs usually receive their payments after 90 days or more from the date when the invoice is generated for a specific product or service sold to the buyer.
If cash-rich industries pay their vendors and sellers on or before time, the MSMEs would not face a liquidity crunch and would be able to increase their employment and growth opportunities.
For Example, if MSMEs supply to large businesses on an ongoing basis, then the latter can extend advance payment for the supplies.
In December, the Minister for Micro, Small, and Medium Enterprises Narayan Rane had informed the Parliament that nearly 9% of MSMEs had shut down because of the impact of the pandemic.
The government had also urged buyers to onboard the Trade Receivables Discounting System (TReDS) platform to tide over their delayed payment issue. RBI had launched the TReDS portal in 2017 to solve the problem of delayed payments where receivables of MSMEs drawn against buyers were financed via various channels through an auction at competitive rates.
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