An MSME Act was enacted with an aim to protect Micro, Small and Medium Enterprises (MSMEs) by imposing penal interest at three times RBI Bank rate with monthly compounding on buyers, including Government departments that delay payments. The law placed the financial burden on the defaulting buyer—not on the MSME.

The Trade Receivables Discounting System (TReDS) appears to have reversed that principle. Instead of ensuring that Government departments honour statutory payment timelines, MSMEs are encouraged to discount their invoices through Non-Banking Financial Companies (NBFCs) simply to receive money that is already legally due to them. The Government buyer avoids the immediate financial consequence of delay, while the MSME's already thin margin is reduced by the discount.

In effect, the statutory penalty on the defaulter is replaced by a financial cost borne by the MSME. What was intended as protection for small businesses risks becoming a financing opportunity for intermediaries.


Example: On average, the Government undertakes around ₹50,000 crore in MSME transactions. A 10% intermediary cut means approximately ₹5,000 crore shifts from MSMEs to intermediaries.

This raises a serious policy question: Has TReDS transformed delayed Government payments into a revenue model for financiers, while forcing MSMEs to sacrifice their earnings just to receive their own legitimate dues? If so, the very objective of the MSME Act stands diluted, and the burden of delay has effectively shifted from the defaulting buyer to the MSME.

The real question is: How will MSMEs survive if they are compelled to sacrifice their already thin profit margins to NBFCs merely to receive their legitimate dues? If the profitability and sustainability of MSMEs are undermined, the consequences will inevitably affect employment, entrepreneurship, and the nation's economic growth, given that MSMEs are the backbone of India's economy.