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Delaying Payments Becomes Riskier for Large Firms in India

Delayed payment penalties against large firms are tightening in India, where the Ministry of Corporate Affairs (MCA) announced the possibility of imprisonment if small suppliers are paid after 45 days. According to the Knowledge & News Network (KNN), the penalties correspond with legislation to ensure smaller suppliers get paid in a timely manner.

If payments are made past the 45-day cutoff, the directors of these large firms are expected to file reports to the MCA with reasons of delayed payments and submit their half-yearly return. In addition to prison time, KNN reports, monetary penalties are also in place of up to ₹25,000, which is equivalent to $351.80.

Unfortunately, payment delays remain an issue in India, according to one-third of respondents to FCIB's India International Credit and Collections survey. In December 2018, the survey found 33% of respondents saw an increase in payment delays, while nearly 70% saw no change compared to the survey eight months prior. The most common causes of delayed payments were cash flow issues as well as cultural norms and customs.

"The Indian markets practice very lengthy payment terms that [cause] a pain in cash flow and hurts cost of capital," a respondent said. "Deep negotiation is needed to shorten the term. Indirectly, they expect some benefit like early payment discount for shortening the terms."

Advice from other respondents included securing payments through letters of credit or cash in advance, and using export insurance to cover sales risk.

—Andrew Michaels, editorial associate

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Friday, 08 December 2023

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