NEW DELHI: Chief Economic Advisor (CEA) V Anantha Nageswaran on Friday called for a review of loan overdue norms for classifying micro, small and medium enterprises (MSMEs) as special mention accounts (SMAs), saying the uniform 90-day timeline does not suit all MSMEs as businesses across diverse sectors have different cash flow cycles.
“The moment you are classified as an SMA, you almost end up becoming a de facto, if not de jure, NPA (non-performing asset). I think that needs to change,” Nageswaran said at a national conference on inclusive growth organised by Sa-Dhan in New Delhi.
“We need to evolve norms that are consistent with our practices and cash flow patterns, rather than adopting a globally uniform benchmark,” he added.
Banks classify loan accounts as SMAs based on the period of overdue payments: 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 an NPA.
The CEA also said the microfinance sector must avoid overleveraging its books. “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, which is why frequent bouts of crisis occur in the microfinance space,” Nageswaran said.
India’s microfinance sector saw a nearly two-year period of severe asset quality stress until 2024-25 (FY25) due to what was characterised as overlending. 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. Sa-Dhan is a self-regulatory organisation appointed by the Reserve Bank of India for the microfinance segment.
With the evolution of digital banking and the incorporation of technology and artificial intelligence (AI) in financing, the need to ensure curbs on overlending has become increasingly crucial, he said.
Talking about the rising incorporation of AI in business, the CEA called for investments in trade skills to increase employment, saying that India’s strength perhaps lies in labour-intensive growth.
“Mindsets have to shift, and we need to invest a lot more in trade skills because not only does it provide the kind of manpower this country needs for becoming a manufacturing powerhouse, but equally importantly, this is what will ensure that the youth of this country are gainfully and meaningfully employed,” Nageswaran said. “Because in general, if there is no purposeful engagement on a daily basis, then the energies will find outlets in areas where we don’t want them to find outlets,” he added.
He also said that in terms of income and employability today, people with trade skills earn much more than those who only get a university degree.
A senior banker at a private sector bank told Business Standard that the RBI has traditionally been cautious about changing NPA classification norms. “Even loans against gold, which are largely collateralised and have adequate margins, follow the standard 90-day overdue norm for NPA classification. Agriculture is an exception, with a separate framework under which loan classification takes into account two crop cycles, allowing for longer repayment periods in certain cases,” the banker said.
Geopolitical tensions and global uncertainty are likely to weigh on MSME profitability, particularly for highly leveraged businesses and those operating on thin margins, according to the banker. “Volatility in commodity prices, higher logistics costs, rupee depreciation against the dollar and rising interest expenses could put further pressure on these businesses. While delinquencies in the segment may see a slight uptick, the increase is unlikely to be alarming, and the banking system remains resilient,” the banker added.
Source: Business Standard
