SMEs facing elevated working capital pressures largely due to rising receivables: India Ratings

Credit and Finance for MSMEs: Small and micro enterprises (SMEs) in the country are going through elevated working capital pressures largely due to rising receivables with their buyers and lack of a similar increase in creditors, said ratings and research firm India Ratings & Research (Ind-Ra) on Thursday. According to the data of the top 1,500 non-financial large corporates analysed by Ind-Ra, the payables by top 10 large corporates to SMEs, as a share of their total payables, had jumped to 1.24 per cent in FY21 from 0.35 per cent in FY18, and 0.1 per cent in FY12. 

The rise in payables was sharpest among the top 51-100 corporates to 2.76 per cent in FY21 from 0.12 per cent in FY15. “Although given the quantum of payables to SMEs is less significant as opposed to the total payables for large entities, it is onerous for SMEs,” Ind-Ra said in its study. 

For instance, Goa-based Joseph Dsouza, who owns the dairy processing unit Dsouza Biotech, has faced the issue of pending receivables from its buyers on multiple occasions. “Currently we are facing the problem of delayed payments from one of our buyers who is a seafood processor. We are yet to receive payments for goods supplied and it is already overdue by a month. Last January also, our payments were stuck with another buyer who delayed it beyond 35-40 days while the company had informed us of the challenges it was facing in business that caused the delay in clearing dues,” Dsouza told Financial Express Online. 

“It was a significant amount and the delay had disrupted our cash flows. To manage the situation, we made some additional borrowings against securities from our bank,” he added without disclosing details.

The increase in receivables was largely due to the higher commodity prices, particularly key inputs such as steel, cement and crude derivatives, along with delayed payments from their large customers. Additionally, credit terms from their key suppliers have not been extended, according to the analysis.

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The sectoral data indicated the sectors such as consumer durables, capital goods, electricals, automobiles & ancillaries that faced high financial challenges due to Covid showed a higher degree of increase in payables to SMEs as a percentage of the total payables than the less affected ones. 

“Generally, payment used to come in 35-45 days but now it takes over 90 days and even up to six months in some cases. I already have a few crores stuck in payments from various companies and PSUs. You have to continuously borrow capital from banks, pump in your own money, manage through rental incomes, etc., to sustain. We are now used to the problem and little can be done about it,” MV Ramesh Babu, CEO of Paramount Platers involved in chrome plating told Financial Express Online. 

Going by the current trend of increasing receivables, the situation will only exacerbate SMEs’ challenges even as the government’s Emergency Credit Line Guarantee Scheme (ECLGS) had supported SMEs to cater to the increase in working capital requirements in FY21 and FY22, the study noted. While the extension of ECLGS could further alleviate some of the stress among SMEs, “the same would put further burden on their debt metrics. Moreover, not every entity would have unutilised limits available for incremental borrowings,” it added.