Low bargaining power of the entities hitting MSMEs badly: Expert panel

PSBs are showing a sustained and significant decline in market share of MSME lending
The expert committee on MSME was concerned about the low bargaining power of the entities and their aversion to take legal recourse against powerful debtors. Ideally what should be a 90-day credit period could stretch to 280 days, which adversely affected the working capital cycle of these firms too.


Ironically, debtors include not only corporates, but government-owned firms, and agencies of both the Centre and states.


In the absence of empirical data, the committee computed average debtor days from FY98 to FY18, based on the CMIE data, taking into account 15,000-20,000 companies each year, of which the smallest size class were used to get close parity with the definition of MSMEs.


"The data shows that average debtor days of the MSMEs has been consistently running over 90 days... While higher debtor days contributes to the high working capital cycle, high inventory turnover ratio and very small bandwidth available from the creditor (as measured by creditor turnover ratio) make things worse," the report said.


To mitigate this, the panel proposed setting up an information utility, which will keep track of all pending dues of the MSME. The mechanism will display names of the defaulting buyers, with an idea to act "as a moral suasion on the buyers to release payment to MSE suppliers”.


Data shows that apart from commercial banks, NBFCs emerged as a big funding source for the sector.


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