The government has laid down explicit provisions to protect and reduce the credit risk of MSME vendors. In order to ensure that the payments to MSMEs are not delayed beyond a specified period, the government has laid down a provision whereby the companies need to provide the details in case the payments are outstanding for more than 45 days to the MSME vendors. This provision mandated the companies to identify which vendors are MSME vendors.
What is an MSME?
Micro, Small and Medium Enterprises, also known as MSMEs, are defined under the Micro, Small and Medium Enterprise Development Act, 2006. The organizations that fulfill the following criteria are classified as MSME organizations:
|Type of Enterprise||Investment in plant & machinery or equipment should not be more than||Turnover should not be more than|
|Micro Enterprise||Rs. 1 crore||Rs. 5 crores|
|Small Enterprise||Rs. 10 crores||Rs. 50 crores|
|Medium Enterprise||Rs. 50 crores||Rs. 250 crores|
Thus, vendors who fulfill the above criteria will be classified as MSME vendors and consequently, the companies are required to ensure that their payments are completed within 45 days beyond which penal interest will be levied for micro and small companies. This necessitates them to verify which of their vendors are MSME vendors.
This becomes a tedious task especially when the company is dealing with thousands of vendors. Further, the MSME status keeps on changing each year. It is not necessary that a vendor who is an MSME vendor today will be an MSME vendor next year as well. Companies faced huge difficulties in verifying the MSME status of their vendors each year and automating this task was the need of the hour.
How A Ltd Automated MSME Confirmations?
A Ltd. is one of the giants in the chemical industry. Being one of the largest chemical companies, it dealt with 3 lakh vendors out of which 30,000 were active vendors. Its total annual purchases were Rs. 18,626.25 crores out of which it identified that only Rs. 110 crores were outstanding to the MSME vendors in the year end. The huge gap in the figures raised concerns over the accuracy of the database. Automation was the need of the hour for getting MSME confirmations from such a huge number of vendors.
Earlier at A Ltd., the process for obtaining MSME confirmations was not systemised. A Ltd. obtained MSME confirmations 3 years before and the same confirmations were used each year to determine whether a particular vendor is an MSME or not. This led to inaccuracies in MSME identification and there were no updates as to whether an enterprise is still an MSME enterprise or not.
An automated solution was the need of the hour. That’s when they implemented Firmway’s MSME confirmation solution. Being a statutory compliance, it was important to ensure the accuracy of data. Non-accurate and untimely compliance led to penal interest @ 3 times of the bank rate notified by the RBI compounded with monthly rests. This led to huge outflows in terms of penal interest which was a direct loss for the business.
How Firmway Helped A Ltd. Automate MSME Confirmations?
Firmway’s MSME confirmation tool allowed A Ltd. to automate its MSME confirmations. Following were the results that they witnessed after implementing Firmway’s MSME confirmation solution:
- 30,000 MSME confirmations sent in a single click
- 35% of the confirmations received in the first confirmation request itself
- Overall, 80% response rate achieved. Earlier, it was just 15%-20%.
- Nil error in detecting the MSME vendors.
- 90% OCR verification success rate
- 15,000 man-hours saved
Earlier, they used to invest 100+ man-hours behind this confirmation exercise which eventually dropped to Zero after implementing the solution. Further, vendor education played an important role here. Firmway helped vendors understand the importance of MSME confirmations and why they were asked for their MSME status. This led to a significant increase in their response rate.
Further, the solution auto-rejected old vendors from the system who claimed themselves as MSMEs earlier but were not MSMEs now. In fact, it identified that 40% of vendors were no more MSMEs. Further, the company had 3,000 new MSME vendors in the database and Firmway’s solution was able to identify MSME vendors with a 0% error rate.
A Ltd. was able to avoid penal interest rates as well as future ROC and CARO non-compliances. Identifying MSME vendors is posing significant difficulties for many such companies. However, by implementing technology, it is possible to automate the confirmations and ensure timely and accurate compliance.