Chief Economic Advisor V. Anantha Nageswaran has asked the Reserve Bank of India to customize NPA classification norms for MSMEs, moving away from a strict 90-day window. He argues the current rule creates premature financial stress for small firms. This shift could impact how banks manage loans for smaller businesses and affect credit availability in the sector.
Chief Economic Advisor V. Anantha Nageswaran on Friday called for a significant review of how the Reserve Bank of India (RBI) classifies bad loans for the Micro, Small, and Medium Enterprise (MSME) sector. Currently, banking regulations mandate that loan accounts are flagged as Special Mention Accounts (SMA) after 30 days of delay, eventually being classified as a Non-Performing Asset (NPA) if payments remain overdue for more than 90 days. Nageswaran argued that this uniform 90-day timeline is too rigid and fails to reflect the unique cash flow and working capital cycles typical of smaller Indian businesses.
During the 21st National Conference of Inclusive Growth, the CEA noted that the current framework often triggers premature financial distress for viable businesses. He explained that a formal NPA classification can effectively act as a penalty, restricting a company’s access to credit and hindering operations long before it is truly in default. By allowing for more flexible, sector-specific norms, the government aims to ensure that temporary cash flow mismatches do not unnecessarily cripple small businesses that are otherwise fundamentally sound.
This proposal is part of a broader government effort to improve the ease of doing business. The Cabinet Secretary has been spearheading an inter-departmental initiative over the last two years to reduce compliance burdens, which often take up significant time and capital for smaller firms. By cutting this red tape, the administration aims to free up internal resources, allowing MSMEs to focus on their core operations and workforce expansion rather than administrative hurdles.
While pushing for easier credit flow, Nageswaran also sounded a note of caution regarding the microfinance sector. He highlighted concerns about the risks of over-lending and potential mis-selling, which are being intensified by rapid digital adoption and AI-driven sales tactics. The CEA advised firms to prioritize savings and insurance products over aggressive credit expansion. He also urged domestic industries to prepare for new trade opportunities, specifically mentioning upcoming agreements with the United Kingdom and the European Union.
For investors and market participants, the key monitorable remains the RBI's response to this suggestion. Any move toward more flexible classification norms could have implications for how banks, particularly those with high exposure to the MSME segment, report their asset quality and manage provisioning requirements. Investors may track future updates from the central bank to understand if this proposal leads to a policy shift or if existing norms will be maintained to preserve banking stability.