Chapter V - Delayed Payments to Micro and Small Enterprises
Section 16
Section 16: interest on delayed payment
If a buyer does not pay as section 15 requires, section 16 makes the buyer liable to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank, whatever the contract says.
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Need advice on Section 16?
This article is for general information. Refer to the Micro, Small and Medium Enterprises Development Act, 2006 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.
Introduction
Section 16 follows the section 15 deadline. When interest starts depends on whether the buyer and supplier agreed a payment date in writing. The liability applies despite anything in the agreement or in any other law.
Key takeaways
Three times the RBI bank rate
The rate is tied to the bank rate notified by the Reserve Bank, so it is not a fixed percentage.
Compounded monthly
The section requires compound interest with monthly rests; simple interest does not match its wording.
Start date follows section 15
Interest runs from the appointed day or, where a date was agreed, from the day immediately after that date.
Establish the payment deadline first
Confirm the supplier's status, the acceptance date and whether a written payment term exists. Section 16 applies only when the buyer fails to pay as section 15 requires.
Pick the correct start date
With no written agreement on payment, interest runs from the appointed day defined in section 2(b). With an agreed date, it runs from the day immediately after that date, keeping in mind the 45-day cap in section 15.
Use the notified bank rate with monthly rests
Find the RBI bank rate for the periods involved, multiply it by three and compute compound interest with monthly rests. Keep the dated rate source and the calculation worksheet with the claim.
Reconcile part-payments
Keep a dated ledger of principal, receipts and the balance outstanding. Get professional advice on allocating part-payments and on disputed amounts rather than applying one rate to everything.
Status of the 2026 amendment
The Micro, Small and Medium Enterprises Development (Amendment) Act, 2026 (No. 16 of 2026) received the President's assent on 13 August 2026. Under its section 1(2) it comes into force on dates the Central Government notifies in the Official Gazette, and different provisions can start on different dates. When this page was checked on 11 October 2026, we had not found a commencement notification, so this page describes the law as it stood before that Act. The 2026 Act does not change section 16. Check the Gazette for a commencement notification before relying on any 2026 change.
Official sources
Practical checklist
Do
- Document the section 15 deadline before calculating interest.
- Keep a record of the RBI bank rate used for each period.
- Calculate monthly compounding and keep the worksheet.
- Record the exact dates of any part-payment.
Avoid
- Do not assume a fixed RBI rate for all periods.
- Do not substitute simple interest for monthly compounding.
Frequently asked questions
Can a contract waive section 16 interest?
Section 16 applies notwithstanding anything in the agreement between buyer and supplier or in any other law. The facts must still meet section 15 and the Act's definition of supplier.
Is the interest rate always the same percentage?
No. It is three times the bank rate notified by the RBI, so check the notified rate for the relevant period.
Need help applying this provision to your situation?
Contact BizeneedLast updated 11 October 2026