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The payment crisis of MSMEs: Even PSUs flout payment rules

Payment crisis faced by micro small and medium enterprises (MSME) is still a big concern. A large number of companies whom we met in the one and a half years as part of our survey said that one of the major reasons for their crisis was the payment default by large companies. The defaulters include mini-Ratna public sector institutions. Even those mid-sized companies which procured orders from cash-rich public sector institutions face different kinds of concerns.

Once their multi-crore order is ready for delivery, the principal company which placed the order has to come for an inspection. This inspection is delayed for several months, keeping on hold the entire work, on which the company has spent a huge sum. It hampers the money flow, increases the cost of capital and other consequent circulatory distresses. A mid-sized company cannot hold on such finished works for long.                  

The prevailing MSMED Act 2006 that dictates payment to MSMEs within 40 days of raising invoice is not sufficient to tackle the crisis. Shockingly, many of the MSMEs are still unaware of such a law. Those who know it do not know how to make the best use of it. Many of the companies are poor in communication.

MSMEs crisis seems to have become more acute, as the habit of defaults by cunning contractors. Many large corporate entities and even cash-rich public sector enterprises continue to contribute to the crisis by their lukewarm response to the payment call of their last-mile project implementing companies, which are usually very small living on the mercy of corporate sub-contractors. Influential first line contractors manage to procure orders through their influences and get them implemented by very small companies at lower rates. Astonishing, but true, these big contractors keep the small subcontractors unpaid for years. On follow up for months and years, the small subcontractors are put to teeter on the edge.

An average MSME cannot have a recovery department, nor can they afford a legal recourse against payment default. Knowing this bitter truth, the main contractors, while sitting on the money they collected from the project owners against the work done by the small subcontractors, finally tell the hapless subcontractors to file a case against them for recovery. This is first-rate anarchy. This anarchy is contributing seriously to the socioeconomic crisis, as many small companies are forced to close their shops due to payment crisis, that in effect percolates down to the labourers’ non-realization of wages.

“When our payments do not come on time we reach a dead end. “More the payments are delayed, the more the crisis we face,” says an entrepreneur, whose company landed in a deep financial crisis after contractors of large public sector enterprises, etc did not pay his outstanding after completing the works as assigned by his contractors, who include Indian and foreign companies.

MSME Council is one of the ways for settlement of payments. But when a case is moved to MSME Council and summons is issued to the defaulter, the defaulter approaches the complainant to withdraw the case for settlement. In most cases, such offers further delay the payment as the cheaters continue to cheat small enterprises. Many small but strong companies face another type of problem. Large private companies and some public sector enterprises boast about handholding SMEs. However, MSMEs say, we have to satisfy many officers to get bills sanctioned.

It is surprising and unbelievable, PSUs, even after 10 per cent TDS and the vendor’s payment of GST on full invoice value, the payment was not released even after two years. That was done by a public sector enterprise. For them, rules are only to be flouted.



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