SMEs often become accountable whenever there is a rise in non-performing assets of banks. While this phenomenon is in context to delay or default in repayment of loans to banks or financial institutions, a survey conducted by credit management services firm Coface suggests that instances of defaults in payments are also common among SMEs.

According to the Coface survey, which covered more than 900 small and big companies across 23 sectors, the risk of payment default in India is the highest amongst proprietorship-based firms, followed by private limited companies and partnership firms. Considering that most SMEs in the country fall under these shareholding patterns, the onus of the defaults can be largely attributed to them.

When a Bizxchange correspondent spoke to Samuel Jesuratnam, country manager at Coface India, in this regard, he said that the risk of proprietary, private and partnership firms failing to clear payments holds true for both small and big companies. “Other than multinational companies and government departments, most other firms stand the risk of defaulting. Therefore, companies that intend to carry out business transactions with such firms do not find it a safe proposition.”

Risks of proprietary firms

In this context, Faisal Khan, an independent financial analyst in Bengaluru, says, “Proprietorship-based companies always stand the risk of defaulting on payments, as the entire financial responsibility is on one person. With the government looking to make it is easier for small proprietary firms to convert to limited liability partnership companies, the former should look to avail the facility once it is implemented.”

Reportedly, about 90% of SMEs in the country are registered as proprietorship firms. Therefore, it is no wonder that the Coface survey shows that payment default risk is highest among proprietorship firms, given the limited resources of small businesses and their susceptibility to market volatility.

Prasenjit Das