Blog on India must clean up its payments ecocsytem

India must clean up its payments ecosystem Sudhir Mehta | Updated on October 09, 2019 Published on October 09, 2019

Delayed payments are hurting MSMEs; fresh infusion of funds to clear dues can boost sentiment, stimulate growth

On the back of weak economic growth and with a view to strengthen private consumption and spur private investment, the Monetary Policy Committee cut policy rates last week — the fifth time in a row. The RBI, over the past few months, has continued its accommodative stance while ensuring that inflation remains well within the target.

There has been a flurry of activity on the economic front too with a slew of measures designed to re-ignite growth. While these are welcome, a critical factor impeding growth is the absence of liquidity where it is needed, combined with uncertainty about realisable returns from new economic opportunities. Paradoxically, businesses with excess liquidity prefer to park capital in high-yielding deposits rather than in long-gestation projects where the risks are much higher and the realisable returns uncertain. This is compounded by the uncertainty of payment collections, which affects cash flows and debt repayment obligations.

India suffers from a poor payments culture and has the worst record in the Asia-Pacific. Government payments are generally delayed, as a result of which downstream payments to sub-suppliers are affected too. The record of the private sector is no better, with payment delays being the biggest cause of worry for most entrepreneurs. The government has amended the laws where payments to MSMEs cannot be delayed beyond 45 days and a redress mechanism has also been set up. This, however, suffers from the critical flaw where the balance of power is titled 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 spiral of delayed payments results in higher purchase prices as the penal interest costs are factored in. Globally, India’s reputation for poor adherence to payment terms is affecting the ‘ease of doing business’ ratings. 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.

Facilitation fund
The government needs to usher in big bang reforms to change this culture of poor payments. The RBI today is flush with reserves and foreign funds are also available at very low rates. The government should create a payment facilitation fund of ₹3 lakh crore. Of this, ₹1 lakh crore should be for the Central government and an equal amount for State governments and public sector units, respectively. 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 ₹3 lakh crore into the economy over the next 60 days will bring about a big change in sentiment and stimulate growth.

Many more companies will be enthused 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 cost of this measure will be around ₹12,000 crore annually, assuming the government will now pay immediately after the work is completed and certified rather than after six to nine months as per the current practice. Since the global economy is awash with liquidity and most government bonds now fetch sub-zero yields, the borrowing cost for the government will be insignificant compared to the benefits.

This one measure will transform sentiments, improve ‘ease of doing business’ and bring in a culture where the payment terms are respected. The payment facilitation fund can be either a balance sheet obligation or monetised to be paid over the next five years from improved tax collections.

A significant cause for non-performing assets in the banking sector is timing mismatches in payments, which can be significantly reduced with this one measure. Many companies which were otherwise healthy have become sick over the past few years because of delayed payments from their customers. Several of these can still be revived if they receive their dues in time.

An announcement by the government that it is reforming and making “Swachh” its payment systems will lead to a transformation in business sentiment.

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