Kamal Mehta
India’s position in the world economy is significant and evolving. As of recent data, India is considered one of the largest economies globally, usually ranking around the fifth or sixth position in terms of nominal GDP. It holds a prominent position in the Micro, Small, and Medium Enterprises (MSME) ecosystem globally because of its vast number of MSMEs, making it one of the largest MSME ecosystems in the world. They are significant contributors to job creation and economic growth.
The government has been taking steps to encourage MSME registration and formalization through initiatives such as the Udyam Registration portal and according to official government data, as of March 2021, there were over 1.5 crore (15 million) registered MSMEs in India. These include businesses that have registered under the MSME Act and are eligible for various benefits and support schemes and estimating the number of unregistered MSMEs can be more challenging due to the informal nature of many small businesses in India. It is believed that there are a significant number of unregistered MSMEs operating across various sectors, especially in rural and informal urban economies.
According to data from the Reserve Bank of India (RBI), as of 2021, around 30-40% of MSMEs in India were estimated to have access to credit from formal financial institutions like banks and NBFCs. This indicates that a significant proportion of MSMEs still rely on unofficial sources or self-funding to meet their credit requirements. The MSMEs will benefit more from the dynamic approach of NBFCs, which will contribute directly to India’s growth.
In India, the payment cycle for bills can vary depending on various factors such as industry practices, contractual agreements, and regulatory requirements and there isn’t a universal standard mandating a specific payment period of 45 days for bills. However, the recent Income Tax rule aimed at promoting prompt payments to vendors and suppliers, especially for Micro, Small, and Medium Enterprises (MSMEs) which started on 1st April 2024 stops businesses from claiming tax deductions for payments beyond 45 days to MSMEs for the supply of goods and services. If a larger firm fails to pay an MSME within 45 days after a signed agreement, it is prohibited from deducting that expense from its taxable income, which could result in higher taxes, as per Section 43B(h) of the Income Tax Act, which was established under the Finance Act 2023. Moreover, India already had MSME Delayed Payment Act and as per the Act, buyers are required to make payments for goods and services procured from MSMEs within 45 days of the acceptance of goods or services and under the Companies Act, 2013, companies are encouraged to disclose their policies on payment of dues to the MSMEs.
Vendor Financing emerges as a game-changer, offering a collateral-free cash flow financing tool by NBFC that empowers MSMEs to fuel their growth and expansion. It, also known as Bills or Invoice Discounting, is a financial arrangement where an Financial Institution provides immediate funds to the supplier of the goods and collects payment from the buyer of the goods after the credit period.
This type of financing is particularly beneficial for MSMEs as it provides much needed cashflow to MSMEs without offering any hard collateral to get the funds.
Vendor Financing also known as Bills or Invoice Discounting, presents a compelling solution for MSMEs seeking flexible, collateral-free financing to drive their business objectives. Optimizing cash flow, MSMEs can unlock growth opportunities, navigate economic challenges, and contribute significantly to the vibrant entrepreneurial landscape. Embracing innovative financial tools like Vendor Financing is key to empowering MSMEs on their journey towards success and resilience in today’s competitive market.
Kamal Mehta isPromoter Director of Parrami Finance Private Limited. Views are Personal
