Chief Economic Adviser V Anantha Nageswaran Calls on RBI to Revisit MSME SMA and NPA Classification Norms — October 9, 2026

Chief Economic Adviser (CEA) V. Anantha Nageswaran has made a strong case for reviewing the Reserve Bank of India's (RBI) loan classification framework for micro, small, and medium enterprises (MSMEs), arguing that current rules penalise small businesses without accounting for their varied working-capital cycles.

Speaking at Sa-Dhan's 21st Annual National Conference on Inclusive Growth in New Delhi, Nageswaran pointed out that standard global credit benchmarks—specifically the rigid 90-day non-performing asset (NPA) timeline and the associated Special Mention Account (SMA) categorisation—fail to reflect domestic business practices and actual cash flow realities across diverse industrial sectors.

The Friction in SMA Tagging

Under the banking regulator's current prudential guidelines, lenders monitor early stress by classifying overdue accounts into Special Mention Account tiers:

• SMA-0: Principal or interest payment overdue between 1 and 30 days.
• SMA-1: Overdue between 31 and 60 days.
• SMA-2: Overdue between 61 and 90 days.

If dues remain unpaid beyond 90 days, the exposure is formally classified as an NPA.

Nageswaran noted that early SMA tagging often triggers adverse actions from lenders, curtailing working capital lines and creating operational distress long before a loan is formally non-performing. "The moment you are classified as SMA, then you almost end up becoming already de facto, if not de jure, NPA already. I think that needs to change," he stated, adding that the Union Finance Ministry has consistently advocated for a more flexible, cash-flow-linked framework.

Tailoring Rules to Diverse Cash Flows

The CEA argued that an engineering unit, a seasonal agricultural processor, and an export-oriented textile supplier operate under completely different payment and operating cycles. Applying a single, uniform 90-day benchmark across all sectors disregards structural payment lags, particularly when small businesses face delayed receivables from large private buyers and state entities.

While acknowledging the role of financing infrastructure such as the Trade Receivables Discounting System (TReDS)—where invoice throughput has grown from roughly ₹2,000 crore at inception to nearly ₹3.5 lakh crore—Nageswaran underscored that formal platforms cannot fully compensate for poor buyer payment discipline or premature regulatory classification.

Implications for Banks and Markets

For Indian public and private sector lenders, MSMEs represent one of the fastest-growing credit segments, consistently expanding at a quicker pace than overall bank credit. However, asset quality in small enterprise lending remains sensitive to economic frictions.

If the RBI were to introduce differentiated SMA triggers and overdue windows tailored to specific sectoral cash flow patterns:

• Credit Flow: Viable enterprises experiencing temporary receivable delays would avoid credit freezes, reducing operational mortality.
• Bank Provisioning: Lenders may see fewer accounts prematurely slipping into high-provisioning brackets, smoothing credit cost volatility.
• Risk Calibration: The banking sector would need to pivot toward granular cash-flow-based underwriting and regional monitoring rather than relying strictly on calendar-based delinquency tags.

Nageswaran reiterated that domestic financial regulations must prioritize sustainable operations for MSMEs, which form the bedrock of domestic employment and industrial manufacturing.

Tags: Reserve Bank of India Ministry of Finance MSME Sector Banking NPA Norms