No end to receivable woes of MSMEs

CRISIL has analysed the debtor-collection period of 2,400 micro, small, and medium enterprises (MSMEs) in the manufacturing sector in 2012-13 (refers to financial year, April 1 to March 31). The study was conducted to determine the time gap between sales and receipt of payment, so as to understand the significance and extent of the challenge of stretched receivables in the MSME sector. The industries chosen for the study comprise electrical components and equipment, plastics and plastic products, chemicals, pharmaceuticals, engineering and capital goods and, lastly, auto components and ancillary. MSMEs in these segments often face delayed payments from their customers, which mainly include medium and large corporates, government departments/corporations, etc.

The results indicate that receivables are stretched the most for electrical components and equipment and plastic and plastic product MSMEs, followed by enterprises in the chemicals, pharmaceuticals, engineering and capital goods, and auto-component industries. To manage their tight liquidity position, these MSMEs depend on borrowing from banks and other sources, which erodes their profitability by increasing their interest burden. Thus, timely payment to MSMEs, as per the provision of the MSMED Act, remains essential to release funds tied up in the working capital cycle.

Note: The analysis is based on the latest audited financial statements of CRISIL-rated MSMEs. Most enterprises finalise their audited financials by the end of the second quarter, after the closure of the financial year. CRISIL rates over 50,000 MSMEs in India. This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy.