CEA Seeks Flexible NPA Norms for MSMEs

New Delhi Chief Economic Adviser V. Anantha Nageswaran on Friday urged the Reserve Bank of India (RBI) to review non-performing asset (NPA) classification norms for micro, small and medium enterprises (MSMEs), arguing that the existing framework does not adequately reflect their business practices and cash flow patterns. Speaking at Sa-Dhan’s national conference, Nageswaran said businesses across different sectors operate on varying working capital cycles, making a uniform 90-day deadline for classifying overdue loans as NPAs unsuitable for all MSMEs. He also pointed out that the classification of loan accounts as Special Mention Accounts (SMAs) can have serious consequences for borrowers, even before their accounts are formally declared non-performing assets. “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. “We need to evolve such norms consistent with the practices and cash flow patterns, rather than adopting a globally uniform benchmark,” he added. Under the existing system, banks classify overdue loan accounts as SMA-0 when payments are overdue for up to 30 days, SMA-1 when overdue for 31 to 60 days, and SMA-2 when overdue for 61 to 90 days. Accounts overdue for more than 90 days are classified as NPAs. Nageswaran said differences in business operations and payment cycles across MSME sectors warrant a closer examination of these timelines. Separately, the CEA stressed that the microfinance sector must prioritise savings and insurance before extending credit. He said excessive borrowing and dependence on loans had contributed to recurring crises in the sector.