When Can an MSME Claim Interest at Three Times the Bank Rate?

What rate can you actually charge a late buyer?

Three times the bank rate notified by the Reserve Bank of India, with monthly rests. That's the whole formula. It comes from Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (everyone just says the MSMED Act), and the section says the buyer owes this interest notwithstanding anything in any agreement between the two of you, or in any other law in force. The bank rate itself is the one the RBI fixes under Section 49 of the Reserve Bank of India Act, 1934. Since 2012 it has simply tracked the marginal standing facility rate.

After the RBI's policy announcement of 7 October 2026, the bank rate is 5.75 percent. So the Section 16 rate for the current period is 17.25 percent a year. From December 2025 until then, the bank rate was 5.50 percent and the Section 16 rate 16.5 percent. And because it compounds every month, the buyer ends up paying a little more each year than the headline figure.

Parliament made it hurt on purpose. The idea was that paying a small supplier on time should cost less than using him as an interest-free bank. That same purpose is why courts are strict about who qualifies. The right is strong. But you only get it when every condition in the statute is met.

When do you become entitled to it?

You need four things in place. One, you have to be a supplier under Section 2(n), meaning a micro or small enterprise with Udyam registration. Medium enterprises are out. They get no Section 16 interest at all. Two, you must have supplied goods or services to a buyer, and the buyer can be anyone, from a private company in Okhla to a central ministry. Three, the buyer must have accepted what you supplied, either actually or by deemed acceptance. Four, the buyer didn't pay by the date Section 15 fixes.

Section 15 is where that date comes from. If you agreed a credit period in writing, the money is due on the agreed date. But no written agreement can push that beyond 45 days from acceptance. If nothing was agreed in writing, payment is due before the appointed day, which Section 2(b) defines as the day after 15 days from acceptance. Interest under Section 16 then runs from the appointed day (or from the day after the agreed date) until the buyer actually pays. Not until you file. Until payment.

Acceptance has a rule of its own, and it catches people out. The Explanation to Section 2(b) treats the day of actual delivery, or the day the service was rendered, as the day of acceptance. If the buyer objects in writing within 15 days of delivery, acceptance is pushed back until you've removed the objection. If no written objection comes in those 15 days, the goods or services are deemed accepted on the delivery date itself. A grumble on the phone doesn't count. We've explained the payment window at more length in our note on the 45-day payment rule for MSMEs.

The sections your claim turns on

Your contract says 12 percent, or no interest. Does Section 16 still apply?

Yes, it does. The words notwithstanding anything contained in any agreement do the work. A clause capping interest at 12 percent, or one saying no interest at all, won't stop you claiming the statutory rate. Courts and Councils have been consistent about this, and several High Courts have said in so many words that the Section 16 obligation overrides the contract. It's the same with a 90 days' credit clause. For the Act's purposes credit is capped at 45 days, and interest starts on the 46th day after acceptance.

Settling is a different matter. Once a dispute has actually arisen, you're free to take the principal and a smaller amount of interest, and courts usually hold both sides to a settlement freely made. That isn't the same as a clause signed on day one that tries to take the right away. We've gone through the clauses buyers like to use in our note on getting interest even when the contract says no interest. If you're the buyer, read how a buyer can settle an MSME claim.

Before any settlement meeting, Advocate B.K. Singh asks suppliers to have the full statutory interest worked out, invoice by invoice. Don't give any of it up blind. A supplier who knows interest has already reached, say, Rs 9 lakh on Rs 20 lakh of principal talks very differently from one who just has a feeling something extra is owed. Buyers can tell.

Recent RBI bank rates and what they make the Section 16 rate

The rate changed halfway through the delay. Which one do you use?

Look at the table. A delay of a year or two can easily cross four or five bank rates. Section 16 just says the bank rate notified by the RBI. It doesn't say whether that means the rate on the appointed day or whatever rate is in force from time to time. In practice, many supplier claims and Council awards apply the rate in force for each period. It reads most naturally from the wording, and anyone can check it. Some awards use a single rate throughout. Whichever you pick, say so in the claim and stick to it, because the buyer's lawyer will go looking for inconsistencies.

Take the exact date each rate came into effect from the RBI's own press releases, not from someone's blog. Our worked example on calculating MSME delayed payment interest shows how to split a period across rate changes and compound it month by month.

One small habit pays off. Save or print the RBI press release for every rate change you rely on, and annex them all to the claim. If the buyer's counsel disputes your figures, you'll have to prove them. Pointing to an annexure is far easier than arguing over which week a rate moved.

The interest also shows up in insolvency. If the buyer company goes into a corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, a micro or small supplier files its claim with the resolution professional as an operational creditor. That claim can include Section 16 interest up to the insolvency commencement date. What actually gets paid depends on the resolution plan, and it's often a fraction of the claim. Don't treat a possible insolvency as a reason to wait.

How monthly compounding works on your claim

Monthly rests means this. At the end of each month, that month's interest is added to the base, and the next month's interest is worked out on the bigger figure. At 17.25 percent a year, the monthly rate is about 1.4375 percent. Take Rs 10 lakh left unpaid for twelve months. Simple interest would be Rs 1.725 lakh. Compound it monthly and it comes to roughly Rs 1.87 lakh. Stretch the delay over two or three years and the difference between those two figures stops being small change for anyone sitting across the table.

Each invoice runs on its own clock. MSME compound interest is calculated on the unpaid principal of each invoice from that invoice's own due date. Part payments need care. Apply them the way your ledger and the buyer's remittance advice show, and recalculate from the date each payment arrived. What if the buyer just sent money without saying which invoices it was for? The usual approach is to set it against the oldest invoices first, unless your past dealings point the other way. Show all of it on the sheet you file. Don't leave the Council guessing.

Interest doesn't stop on the day you file. It keeps running until payment. Make sure the Council award or court decree says Section 16 interest continues on the unpaid principal until it's paid. Otherwise you'll be fighting the same point again at execution.

What can knock out a claim at three times the bank rate?

• You registered after the contract. In Silpi Industries (2021) and Mahakali Foods (2022), the Supreme Court held that a supplier who wasn't registered on the date of the contract can't claim the Act's benefits for it. After NBCC v. State of West Bengal (2025), a larger bench is looking at this again. Read whether a Udyam registration after the contract still helps.
• You're a medium enterprise. Medium units do register on Udyam, but they get no Section 16 interest. If your turnover has grown over the years, check which category you fell in for the years you supplied.
• You're a trader. Retail and wholesale traders were let onto Udyam in 2021, but only for priority sector lending. Several High Courts have held they can't use Chapter V. There's more in whether a trader can use the Facilitation Council.
• The buyer rejected the goods in writing within 15 days. Acceptance then waits until you've cleared the objection, and interest only runs from that later date.
• Limitation. Once the claim goes to arbitration or court, the three-year limitation period applies (Silpi Industries, 2021). Older claims can still go to conciliation after Sonali Power Equipments (2025). See the time limit for an MSME delayed payment claim.
• You signed a settlement. A full and final settlement made freely after the dispute arose usually ends the interest claim along with everything else, so read any settlement letter slowly before you put your name to it.

Can a service provider or a contractor claim it?

A service provider can, yes. Sections 15 and 16 speak of goods supplied and services rendered, and the definition of acceptance covers services too. The real problem is proof. Nobody issues a goods receipt note for a consulting report, or for a month of security guards at a factory gate in Bawana. So you prove acceptance through sign-off emails, approved timesheets, completion certificates, or the plain fact that no written objection came within 15 days. Build that paper trail while the work is going on. It's much harder a year later.

Contractors on works contracts are on shakier ground. Some courts have accepted claims by micro and small contractors under the Act. Others have asked whether a composite works contract is really a supply of goods or services in the Act's sense. If you're a contractor with a large claim, get advice on the current position for your kind of contract before you choose between the Council and a civil suit.

Council, court, or both: where do you claim?

Most suppliers go to the Micro and Small Enterprises Facilitation Council under Section 18. It conciliates first. If that fails, it arbitrates, and in the award it applies Section 16 interest as a matter of course, whatever the purchase order said. Our guide to how the MSME Facilitation Council works walks through the process. You file before the Council where you, the supplier, are located. For a unit in Delhi, that means the Delhi Council, even if the buyer sits in Pune.

Section 16 interest is a substantive right. It isn't something only the Council can give you. You can claim it in a commercial suit or a summary suit in a civil court as well, and courts have awarded it. A suit may work better when the buyer is shifting assets and you need attachment before judgment, or when your status under the Act is shaky and you'd rather have one court decide everything together. For the court side, including Section 34 of the Code of Civil Procedure for suppliers who can't use Section 16, see the commercialcourtlawyer.com guide on interest in a recovery suit.

When Advocate B.K. Singh goes over an interest claim, he starts from acceptance dates, not invoice dates. Most supplier sheets we're shown start interest from the invoice date. But an invoice raised before dispatch, or goods that reached the buyer's store a week after the invoice, move the appointed day. Fixing that takes an afternoon. And it takes away the buyer's easiest objection.

Claiming Section 16 interest, one step at a time

These steps hold whether you end up before the Council or in a court. Most of the effort goes into the first three.

1. Check your status for the years you supplied

   Put the date and category on your Udyam certificate next to the dates of the purchase orders or contract. If your turnover grew and your category changed, find out which category applied in those years. If you're a trader, stop and take advice before going any further.

2. Pin down when each invoice was accepted

   Go by delivery challans, GRNs, inspection reports or service sign-offs. Not the invoice date. Mark any written rejection within 15 days and the date you cleared it.

3. Work out the due date

   Where a credit period was agreed in writing, add it to the acceptance date, but never beyond 45 days. Where nothing was agreed, the due date is the 15th day after acceptance, and interest starts the next day.

4. Calculate interest period by period

   Use three times the bank rate in force for each period, compound monthly, and adjust for part payments on the dates they came in. Keep the working in a spreadsheet someone else can follow without ringing you.

5. Send a written demand with the sheet

   Ask for principal and interest by a fixed date. Say that interest is still running. Keep proof it went. Whatever the buyer says back, or doesn't say, decides your next move.

6. Pick the forum

   File a reference before the Facilitation Council where you're located, or a commercial suit or summary suit if that fits better. Claim interest up to the filing date and ask for it to continue until payment.

7. Keep the number fresh

   Update the interest working before each important hearing and before every settlement meeting. The figure on the table should always be today's.

On the buyer's side: what to check when a 3x claim arrives

Most buyers react to the headline figure. They panic, or they wave it away. Neither helps. Your finance or legal team should go through it in this order. Was the supplier registered as micro or small on the date of each purchase order? Is it really a manufacturer or service provider, or is it a trader? Were any invoices rejected in writing within 15 days? Has interest been counted from acceptance and not from invoice dates? Do the bank rates match what the RBI notified for each period, and have the part payments been credited on the dates the money actually left your account? Quite often one of them isn't.

If the claim survives all of that, the interest is a statutory liability, and fighting it rarely saves money. Often the sensible course is an early settlement that pays the principal quickly and agrees a reduced figure for interest. If a Council notice has already reached you, read how to respond when an MSME supplier files a case against your company.

How long it takes and what it costs, apart from fees

Papers that prove the interest claim

• Your Udyam certificate, showing when you registered and in which category
• Purchase orders or the contract, so any agreed credit period is clear
• Every invoice, with its date and amount
• Delivery challans, e-way bills and GRNs that show when the goods arrived or were accepted
• Any written rejection from the buyer, and proof of when you sorted it out
• Bank statements and remittance advices for each part payment
• The buyer's ledger account from your books, and any balance confirmation they signed
• RBI notifications or press releases for the bank rate in each period you've used

Why buyers' finance teams take this seriously now

Three more provisions make paying late expensive, over and above the interest. Section 23 of the MSMED Act says the interest paid isn't deductible for income tax. Section 43B(h) of the Income-tax Act, 1961, in force from the 2023-24 financial year, lets a buyer deduct a payment to a micro or small supplier only in the year it's actually paid, if it pays beyond the Section 15 time limit. Check with your tax adviser how this carries over under the Income-tax Act, 2025. Our note on how Section 43B(h) helps MSMEs get paid explains it. And companies must report dues to micro and small suppliers outstanding beyond 45 days in a half-yearly MSME Form 1 return to the Registrar of Companies.

Suppliers can use all of this. Add one polite line to your reminder: the buyer's accounts will have to disclose the unpaid amount and the interest, and the interest isn't tax-deductible. That often moves your payment up the finance team's list. Faster than another phone call, usually.

What to do this week

Dig out your Udyam certificate and write down its date and category. For every unpaid invoice, note the delivery date, any written rejection, the agreed credit period and the part payments received. Work out each due date under Section 15, then apply the Section 16 rate period by period. Send the buyer a demand with the sheet attached. If you're still weighing the Council against a court, read MSME Council or commercial court.

If you'd like your interest working and papers looked at before you send that demand or file a reference, or you want to hear when the bank rate or the law changes, you can reach Advocate B.K. Singh's team through our contact page.