The government is focusing on supporting micro, small, and medium enterprises (MSMEs) facing financial stress, particularly those classified under the banking category of Special Mention Accounts (SMA). The SMA classification, initially intended to help MSMEs recover before their accounts turned into non-performing assets, has inadvertently exacerbated their troubles.

“When an account becomes SMA 1, it almost becomes an untouchable asset, which actually becomes counterproductive. The idea is to nurse them back before they become a bad asset. But the very act of placing them with a label, with a tag attached to them as SMA 1, almost puts them on a path for financial support because banks stop lending to them,” Chief Economic Advisor V Anantha Nageswaran said during an interaction at the recently concluded Sankalp Summit in Varanasi.

As of March 31, 2024, the total credit outstanding of scheduled commercial banks (SCBs) to the MSME sector stood at ₹28.04 lakh crore, with non-performing assets (NPAs) in this segment amounting to ₹1.25 lakh crore, Minister of State for Finance Pankaj Chaudhary had mentioned in the Lok Sabha. The gross NPA ratio for the sector was reported at 4.46%, significantly higher than the overall gross NPA ratio of 2.74% for total loans and advances, pointed out the minister. According to the FICCI-IBA Bankers’ Survey, in FY24, banks wrote off ₹20,261 crore in bad loans linked to micro and small enterprises against ₹28,392 crore written off in the previous fiscal.

In fact, MSME industry bodies have called on the Reserve Bank of India to extend the threshold period for stressed loan accounts under the Special Mention Account-2 (SMA-2) category from 90 days to 180 days. They have also requested a review of the definition of "wilful defaulter" for smaller enterprises, arguing that the current framework is excessively rigid and disproportionately penalizes minor delays, severely affecting the credit scores of these businesses. According to the existing classification system, banks place loans into three SMA categories: SMA 0, where principal or interest payments are not overdue for more than 30 days but show early signs of stress; SMA 1, for payments overdue by 31-60 days; and SMA 2, for payments overdue by 61-90 days. If overdue for more than 90 days, loans are categorized as sub-standard, the first stage of being classified as a non-performing asset (NPA).

The government is now working on initiatives to address these challenges, including credit guarantee schemes specifically tailored for manufacturing MSMEs. "We are working on specific credit guarantee schemes for manufacturing MSMEs and also for taking care of MSMEs which become in the banking parlance in India, SMA, special management accounts, SMA 1 and SMA 2.”

Furthermore, the government aims to ensure that SMEs are freed from the clutches of over-regulation, which continues to stifle growth. Recognizing that MSMEs are vital to job creation and economic growth, the focus has been on measures such as the redefinition of MSMEs, improved access to finance through receivables exchanges, and encouraging banks to rely on internal credit models rather than external ratings for lending. The Emergency Credit Line Guarantee Scheme, introduced during the pandemic, also served as a lifeline for MSMEs.

“The heavy hand of the state on the shoulders of MSMEs is still very heavy. The burden is very heavy... Deregulation, deregulation, and deregulation—that’s what we need,” said Nageswaran, underscoring the urgency of reducing bureaucratic pressures to unlock the potential of MSMEs.

SMA

SMA tag an albatross for MSMEs: CEA V. Anantha Nageswaran