Chief Economic Adviser (CEA) V. Anantha Nageswaran on Friday said the RBI should review the non-performing asset (NPA) classification norms for micro, small and medium enterprises (MSMEs) to align them with the practices and cash flow patterns of these firms.
He highlighted that businesses across diverse sectors have different cash flow cycles and a uniform 90-day timeline for declaring NPAs does not suit all MSMEs.
Nageswaran said that the transition to SMA classification itself can have significant consequences for borrowers, with businesses potentially facing difficulties even before their accounts are formally classified as NPAs.
Why CEA Nageswaran Wants RBI to Review MSMEs NPA Norms
“The moment you are classified as SMA, then you almost end up becoming de facto, if not de jure, NPA (non-performing asset) already. I think that needs to change,” Nageswaran said at the Sa-Dhan’s national conference.
“We need to evolve such norms consistent with the practices and cash flow patterns, rather than adopting a globally uniform benchmark,” he added.
Banks classify loan accounts as SMAs based on how long payment is overdue — up to 30 days as SMA-0, 31 to 60 days as SMA-1, and 61 to 90 days as SMA-2. A loan account that remains overdue beyond 90 days is classified as a non-performing asset (NPA).
How the 90-Day NPA Rule Affects Small Businesses
India’s MSMEs operate across different sectors, which have different working capital cycles, so a uniform norm of 90 days was not suitable for all of them, Nageswaran said.
However, the CEA also highlighted that the microfinance sector must avoid excessive borrowing and rely more on internal savings to finance their business.
“From a pure finance perspective, the priority should be savings, insurance, and then credit. But the sector has reversed that order. The priority pyramid is inverted, that is the reason why the frequent bouts of crises occur in the microfinance space,” Nageswaran said.
Microfinance Sector Shows Signs of Recovery After FY25 Stress
India’s microfinance sector saw a period of severe stress in 2024-25 (FY25) due to what was characterised as over-lending. However, the sector has started showing signs of recovery, with an 11 per cent contraction in its loan book in FY26, according to Sa-Dhan’s Bharat Microfinance Report.
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