MSMEs: Unpaid Dues: How State Governments Could Effectively Help MSMEs Through Bill Discounting

Micro-small and medium-sized enterprises (MSMEs) are the driving force behind the Make in India, Vocal for Local and Aatmanirbhar Bharat initiatives. They are boldly facing supply chain disruptions caused by the covid-19 pandemic and ongoing geopolitical issues between Russia and Ukraine.

Invoice discounting or supply chain finance (SCF) is one of the most viable options for MSMEs to break the vicious cycle of unpaid invoices to meet their working capital needs. In the process, the supplier sells his invoices to the financier (postman) at a reduced price to benefit from immediate cash.

On the other hand, the buyer can obtain short-term credit by extending his debts. TReDS (Trade Receivables Discounting System) platforms digitize the SCF process and act as a bridge between buyers, suppliers and financiers. The system addresses the main concern of credit availability for MSMEs.

Small note size, lack of credit history and insufficient collateral to raise funds from the traditional banking system are the main issues facing small businesses. The invoice auction mechanism gives MSMEs the bargaining power to benefit from short-term credit at competitive interest rates with several financiers on board.

Progressive State Government Initiatives to Help MSMEs The Union Government has mandated businesses with Rs 500 crore turnover to embark on Trade Receivables Discounting System (TReDS) platforms to democratize the ecosystem digital. Various initiatives such as the Emergency Line of Credit Guarantee Scheme (ECLGS) have widened the scope of credit availability to MSMEs. Central and state government authorities have begun to adapt to the TReDS ecosystem to meet the

concerns of small businesses by providing them with cost-effective access to credit to facilitate their operating cycles.

The Goa government was the first state government to integrate the TReDS platform and set an exemplary model for other states by helping over 250 MSMEs navigate through choppy waters and eliminating unpaid dues from 750 crores so far.

Since Goa is a travel destination and the economic activities of the state are mainly boosted by tourism, MSMEs in the region have suffered huge losses due to the decrease in tourism income brought about by the closures and restrictions. waves of covid that followed. Small businesses struggled to survive, and the rate of state tax collection plummeted.

Many MSMEs have significant exposure with state government agencies. The Goa government has proactively taken charge of the situation and integrated with the RXIL TReDS platform. This enabled rapid collection of accounts receivable for suppliers (MSMEs) while buyers (government authorities) benefited from favorable payment terms from financial institutions. There was no immediate expenditure of state government cash and automated repayments to financial institutions were triggered on agreed due dates. The State Public Works Department (PWD), Electricity and the Goa Infrastructure Development Corporation have taken the lead in paying bills through the TReDS ecosystem.

With the digitization of the factoring process, buyers, suppliers and financiers are integrated on a single platform, making the process transparent, cost effective and fast. SCF digital platforms offer unique digital verification, access to digital invoices and one-click transaction capabilities. Financier risk is mitigated as loans are disbursed to government entities with a better credit history and credibility. With the rise of NPAs on the books of banks and NBFCs, this arrangement is a win-win situation for all parties.

In the post-covid era, when the economy returns to normal, many state governments are following suit to help MSMEs whose operating cycles have faltered due to unpaid bills.

Perspectives

The synchronous efforts of Union and State governments to help MSMEs integrate TReDS platforms is a very progressive approach, inspiring also private actors. SCF digital platforms provide robust infrastructure and integrate technology and government policies to promote MSME financial inclusion. The digital transformation will incentivize financiers to shift from an asset-based approach to a cash flow-based valuation for MSMEs and help them reap the benefits of bill discounting.

(The author is MD and CEO of Receivable Exchange of India)

(The one-stop destination for MSMEs, ET RISE provides news, views and analysis on GST, exports, finance, policy and small business management.)

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