Compliance
Section 16 forces a buyer who misses the payment deadline to pay compound interest at three times the RBI bank rate, compounded monthly, and the rate cannot be waived by contract, raising the cost of delayed payments for small suppliers.
Check your DPDP readiness — free More on the blogWhen a buyer does not pay a registered micro or small enterprise by the appointed day, the MSME Act steps in. Section 16 makes the buyer liable for interest that is calculated on a compound basis with monthly rests. The interest rate is set at three times the bank rate that the Reserve Bank of India publishes, not the repo rate or any rate the parties may have agreed in their contract.
The appointed day is defined by Section 15. It is either the date the parties have agreed for payment, or, if no agreement exists, fifteen days after the buyer accepts the goods or services, but it can never be later than forty‑five days from acceptance. From the day after this appointed day, interest begins to accrue automatically, regardless of whether the supplier has sent a reminder or filed a claim.
The RBI publishes a bank rate each month. Multiply that rate by three to obtain the annual statutory rate. For example, if the bank rate is 5.5 per cent, the statutory rate becomes 16.5 per cent per annum. This rate is then applied on a monthly compounding basis, meaning each month the interest is added to the principal and the next month’s interest is calculated on the new total.
Many firms calculate simple interest instead of the required compound interest, which significantly understates the amount owed for longer delays. Some mistakenly use the RBI repo rate rather than the bank rate, leading to a lower figure that the law does not recognise. Others rely on contractual clauses that attempt to cap or waive the interest, but Section 16 expressly overrides any such agreement. Another frequent error is assuming a ninety‑day credit term is valid. Section 15 caps the maximum credit period at forty‑five days from acceptance, so any longer term is ineffective for the purpose of calculating interest. Finally, some suppliers think they must first send a demand notice before the interest applies, but the liability arises automatically from the statute once the appointed day is missed.
The statutory interest can quickly increase the amount owed. Because it compounds monthly, a three‑month delay on a Rs 1,00,000 invoice at a 16.5 per cent annual rate results in roughly Rs 4,200 of interest, not the Rs 1,250 that simple interest would produce. Over longer periods, the cost escalates, providing a financial incentive for buyers to pay on time and helping small suppliers protect their cash flow. For buyers, the rule creates a clear cost of delaying payments. Knowing that interest will be charged at a rate tied to RBI policy, and that it cannot be negotiated away, encourages stricter internal credit controls and timely processing of invoices. This reduces the risk of disputes and the administrative burden of calculating interest manually. In practice, both parties benefit from checking the current RBI bank rate before finalising any payment schedule. Suppliers can include a reference to Section 16 in their terms, while buyers can plan for the additional expense if a payment is likely to be late. Using an online calculator that incorporates monthly compounding can simplify the process and ensure compliance.
Section 16 imposes compound interest with monthly rests at three times the RBI bank rate. If the bank rate is 5.5 per cent, the statutory rate is 16.5 per cent per annum, compounded monthly, and it applies from the appointed day.
No. Section 16 operates notwithstanding any agreement between the buyer and the supplier. Any clause that tries to reduce, cap or waive the interest has no legal effect against the statutory liability.
If no payment date is agreed, Section 15 fixes the appointed day as fifteen days after the buyer accepts the goods or services, but never later than forty‑five days from acceptance. Interest starts the day after that appointed day.
The monthly rate is the annual statutory rate divided by twelve. For a partial month, multiply the monthly rate by the fraction of days overdue (days divided by 30) and add it to the interest accrued for whole months, following the compound‑interest formula.
Founder & CEO at VidhiSar. I have watched four companies pay for the same mistake, and it was never the mistake anyone expected. VidhiSar is software, not a law firm: every answer names the section it relies on so you can check it, and anything turning on your specific facts is worth putting to a professional. More about who builds this