Payment Facilitation Fund - Shortfalls in Payment Ecosystem

What is the issue?

A critical factor impeding growth is the absence of liquidity where it is needed; delayed payments are hurting MSMEs.
Addressing the payment ecosystem to infuse fresh funds to clear dues is essential to boost investors’ sentiment and stimulate growth.

How is the liquidity scenario?

Absence of liquidity where it is needed is a critical factor that is limiting growth in the recent period in India.
This is combined with the uncertainty about realisable returns from new economic opportunities.
Paradoxically, businesses with excess liquidity prefer to park capital in high-yielding deposits.
They are wary of investing in long-gestation projects where the risks are much higher and the realisable returns are uncertain.
This is compounded by the uncertainty of payment collections, which affects cash flows and debt repayment obligations.

What are the concerns with payments?

India suffers from a poor payments culture and has the worst record in the Asia-Pacific.
Government payments are generally delayed, and consequently downstream payments to sub-suppliers are affected too.
In the private sector too, payment delays remain a biggest cause of worry for most entrepreneurs.
The government has amended the laws where payments to MSMEs cannot be delayed beyond 45 days.
A redress mechanism has also been set up.
However, this suffers from the critical flaw where the balance of power is tilted in favour of the government or private buyer.
MSMEs are hesitant to take the redress route as they fear denial of future orders once a complaint is made.
This cycle of delayed payments results in higher purchase prices as the penal interest costs are factored in.
Due to their sheer size, MSMEs are the worst affected by delayed payments.
They have a very small window and sometimes none to cover up the financial shortfall, considering the high cost of borrowing and less robust credit rating.
Globally, India’s reputation for poor adherence to payment terms is affecting the ‘ease of doing business’ ratings.

What is a possible measure?

The government needs to usher in big bang reforms to change this culture of poor payments.
The RBI today has enough reserves, and foreign funds are also available at very low rates.
The government should thus create a payment facilitation fund.
Equal shares have to be given to the Central government, State governments and public sector units.
The government can then use the TReDS platform to clear all overdue payments of the Central/State governments and PSUs with limits for each.
The release of this fund into the economy would bring about a big change in investor sentiment and stimulate growth.

What would the fund’s benefits be?

The global economy is flooded with liquidity.
So, the borrowing cost for the government for the measure will be insignificant compared to the benefits.
With the fund, many more companies will be interested to work with the government, resulting in lower prices.
Such a large infusion into the economy will have an immediate and lasting impact on both consumption and investment.
The move could transform sentiments, improve ‘ease of doing business’ and bring in a culture where the payment terms are respected.
A significant cause for non-performing assets in the banking sector is timing mismatches in payments, which can be addressed with the fund.
Companies that have become sick over the past few years because of delayed payments from their customers can still be revived if they receive their dues in time.

Source: Business Line

Quick Fact

TReDS

Trade Receivables Discounting System (TReDS) is a scheme for setting up and operating the institutional mechanism for payments.
It facilitates the financing of trade receivables of MSMEs from corporate and other buyers through multiple financiers.
The buyers include Government Departments and Public Sector Undertakings (PSUs).