Delayed payments to pharma MSMEs: A major challenge

Delayed payments put SMEs at a disadvantage compared to large size counterparts, inhibiting their ability to compete effectively in the market and addressing the issue requires a multi-faceted approach involving various stakeholders, says Vishal Kumar, Senior Director Business, M1Xchange

Small and Medium Enterprises (SMEs) form the backbone of India’s economy, contributing significantly to employment generation and economic growth. However, one of the major challenges faced by MSMEs in India is delayed payments. This issue has far-reaching consequences, affecting the financial stability and sustainability of these businesses.

Reasons for delayed payments to pharma MSMEs

Inefficient cash flow management by large companies, including delayed receivables processing and elongated payment cycles, can directly impact SMEs by delaying their much-needed payments. Pharma MSMEs usually operate in a weaker bargaining position compared to larger companies. This power imbalance can be exploited by buyers, who may delay payments without facing significant repercussions. Pharma MSMEs may lack negotiating power or alternatives to deal with late payments effectively.

Many buyers, both private and public entities, are pulled into following delayed payment practices due to administrative inefficiencies, bureaucracy, continued thrust to better margins or a lack of awareness regarding the impact of delayed payments on pharma MSMEs.

Challenges faced by pharma MSMEs due to delayed payments

Delayed payments pose severe challenges for pharma MSMEs. It disrupts the cash flow of SMEs, making it challenging for them to meet operational expenses, pay employees, and invest in growth initiatives. This financial strain can even push some pharma MSMEs to the brink of closure. To bridge the gap caused by delayed payments, pharma MSMEs may resort to relying on expensive alternative financing options. This leads to increased interest costs and debt burdens, further impacting their financial health negatively.

Limited working capital due to delayed payments also restricts the ability of the industry to expand their operations, invest in new technology, or explore new markets. This hampers their growth potential and stifles job creation.

Further, delayed payments put SMEs at a disadvantage compared to large size counterparts, inhibiting their ability to compete effectively in the market.

Addressing the issue

Addressing the issue of delayed payments to pharma micro, small, and medium enterprises (MSMEs) requires a multi-faceted approach involving various stakeholders.

Government interventions are essential in driving change. Strict enforcement of existing regulations, such as the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, is necessary to ensure timely payments to MSMEs. Penalties for non-compliance should be imposed to deter delayed payment practices.

The Union Budget 2023 introduced a modification to Section 43B of the Income Tax Act, aiming to allow buyers to claim income tax deductions solely for payments made to MSME suppliers. In essence, business entities cannot consider the expense eligible for deduction until the actual payment is made to the MSME seller. This proposal seeks to address the persistent issue of delayed payments faced by pharma MSMEs and offer them the necessary liquidity support they require.

Encouraging the adoption of digital payment systems and e-invoicing can streamline payment processes and reduce paperwork. Further, standardising payment terms and practices across industries ensures clarity and consistency, facilitating smoother transactions and timely payments.

Addressing the issue

Collaboration is key to addressing delayed payments. Pharma MSMEs should be encouraged to join industry associations, enabling collective bargaining power and a united voice to negotiate better payment terms with buyers.

Efficient dispute resolution mechanisms are necessary to resolve payment disputes promptly. Establishing dedicated arbitration centers or online platforms can offer accessible and cost-effective means for pharma MSMEs to seek a resolution and recover their dues.

Promoting awareness and accountability is also vital in changing mindsets and practices. Awareness campaigns should educate both buyers and MSMEs about the detrimental effects of delayed payments. Emphasising legal obligations and penalties associated with late payments raises accountability and encourages compliance. Creating reporting mechanisms or platforms where MSMEs can anonymously report instances of delayed payments can help identify repeat offenders and foster transparency.

To boost timely liquidity in the hands of pharma MSMEs, the financing of business transactions at Trade Receivables e-discounting system (TReDS) platforms should be incentivised by the government. Such incentives should be provided to all the stakeholders involved in TReDS financing transactions i.e MSME supplier, buyer – private as well as public and banks/financial institutions.

By implementing these strategies, a more supportive environment can be created for MSMEs and it can help to address the issue of delayed payments to pharma MSMEs in India.

alternative financingfinancial healthpharma MSMEsSmall and Medium EnterprisesTReDS financing transactions
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