Introduction
The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) was introduced to provide a legal framework for the promotion and development of micro, small, and medium enterprises in India. One of the significant challenges faced by MSMEs is the issue of delayed payments from their clients, which can adversely impact their cash flow and working capital. To address this issue, the MSMED Act provides for the payment of interest on delayed payments to MSMEs. In this blog, we will discuss how interest is calculated on delayed payments to MSMEs and the relevant provisions of the MSMED Act.
Provisions of the MSMED Act
Section 15 of the MSMED Act provides that a buyer who has purchased goods or services from an MSME must make payment on or before the date agreed upon between the buyer and the MSME. If the buyer fails to make payment on the agreed date, then he shall be liable to pay interest to the MSME on the amount due.
The interest payable shall be calculated at a rate which is three times the bank rate notified by the Reserve Bank of India (RBI). The bank rate is the rate at which the RBI lends to commercial banks. As of March 2023, the bank rate notified by the RBI is 4.25%. Therefore, the interest payable on delayed payment to MSMEs shall be calculated at the rate of 4.25% x 3 = 12.75% per annum.
The MSMED Act, 2006 (Micro, Small and Medium Enterprises Development Act) is an Indian legislation that aims to promote and facilitate the development of micro, small, and medium enterprises (MSMEs). Some of the key provisions of the MSMED Act include:
- Definition of MSMEs: The act defines micro, small, and medium enterprises based on their investment in plant and machinery or equipment.
- Registration of MSMEs: The act provides for the registration of MSMEs, which enables them to avail of various benefits such as access to credit, subsidies, and government schemes.
- Delayed Payment: The act provides for the settlement of dues of MSMEs within a stipulated time period, failing which the buyer shall be liable to pay compound interest with monthly rests to the supplier.
- Credit facilities: The act provides for the creation of a fund for the promotion and development of MSMEs, and also enables them to obtain credit facilities from banks and financial institutions.
- Technology Upgradation: The act provides for the establishment of technology centers, common facility centers, and incubators for MSMEs.
- MSME Samadhaan: The act provides for the establishment of MSME Facilitation Councils to address disputes related to delayed payments, and provides for a mechanism for the resolution of such disputes through conciliation and arbitration.
The term “MSME Samadhaan” refers to the mechanism for resolution of disputes related to delayed payments under the MSMED Act. The MSME Samadhaan portal is an online platform launched by the Government of India for facilitating the resolution of disputes related to delayed payments to MSMEs. It enables MSMEs to file their applications online and provides for the speedy resolution of disputes through conciliation and arbitration.
Calculation of Interest on Delayed Payment
Let us understand the calculation of interest on delayed payment through an example. Suppose an MSME has provided goods worth Rs. 1,00,000 to a buyer, and the payment is due within 30 days of the receipt of the goods. However, the buyer fails to make payment on the due date and makes the payment after 45 days. In this case, the buyer shall be liable to pay interest to the MSME on the amount due for the period of delay, i.e., 15 days.
The interest payable by the buyer shall be calculated as follows:
Interest = (Amount Due x Interest Rate x Number of Days)/365
Amount Due = Rs. 1,00,000
Interest Rate = 12.75% per annum
Number of Days = 15
Substituting the values in the formula, we get:
Interest = (1,00,000 x 12.75% x 15)/365
= Rs. 524.66
Therefore, the buyer shall be liable to pay an interest of Rs. 524.66 to the MSME for the delay in payment.
What are SME payment terms in India?
In India, the payment terms for Small and Medium Enterprises (SMEs) may vary depending on the industry, the size of the business, and the negotiation between the buyer and the seller. However, the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) provides some guidelines for payment terms for SMEs.
According to the MSMED Act, a buyer who has purchased goods or services from an SME must make payment on or before the date agreed upon between the buyer and the SME. The payment terms must be mutually agreed upon between the buyer and the SME, and the terms should not exceed 45 days from the date of acceptance or deemed acceptance of the goods or services.
If the buyer fails to make payment on the agreed date, then he shall be liable to pay interest to the SME on the amount due, as per the provisions of the MSMED Act. The interest payable shall be calculated at a rate which is three times the bank rate notified by the Reserve Bank of India (RBI).
The RBI has also issued guidelines for payment terms for SMEs in India. According to the guidelines, banks should ensure that SME borrowers receive timely payment from their buyers. The payment terms should not exceed 120 days from the date of the invoice or the date of acceptance of goods or services, whichever is earlier.
Conclusion
Delayed payments can cause significant cash flow problems for MSMEs, and the payment of interest on delayed payments can provide some relief to them. The MSMED Act provides for the payment of interest on delayed payments to MSMEs at the rate of three times the bank rate notified by the RBI. The interest payable shall be calculated for the period of delay, and it is essential for MSMEs to keep a record of the due dates and follow up with their clients for timely payment. It is advisable for MSMEs to consult a professional for any queries regarding the calculation of interest on delayed payments.
