New credit relief system for stressed MSMEs; ‘halfway house’, says FISME

In a press release, the Federation of Indian Micro Small & Medium Enterprises (FISME) said members have welcomed the announcement of a fund to help stressed MSMEs red-flagged under the SMA category. “However, they termed the measure a ‘halfway house’ as the major issue of a lack of empowered officials at branch levels remains unaddressed,” it said.

Before a loan account turns into NPA (non-performing asset), banks are required to identify incipient stress in the account by creating a sub-asset category called special mention accounts. An account is transferred to this category once the earliest signs of sickness or irregularities in loan repayment are identified.

There are three types of SMAs:

SMA-0 (when principal or interest payment is not overdue for more than 30 days but account is showing signs of incipient stress); SMA-1 (when principal or interest payment is overdue between 31-60 days); and SMA-2 (when principal or interest payment is overdue between 61-90 days).

Classification under SMA can trigger penal actions, impact credit score, and even restrict access to credit.

In the recent past, MSMEs have complained that the current SMA classifications, instead of supporting businesses, effectively restrict them from accessing credit at crucial times. They argue that the moment an MSME loan account is classified as SMA-0, the banker will single it out and block access to credit.

In the weeks leading up to the Budget, associations representing MSMEs met with officials from the Ministry of Finance and Reserve Bank of India to extend the threshold period for stressed loan accounts under the SMA-2 category to 180 days from 90 days currently as it can take up to 200 days for an MSME to get paid by buyers. They argued that the current timeline pushes stressed MSMEs towards default.

As per industry data compiled by India SME Forum, the gross NPA in the MSME sector stood at 4.4 per cent in March 2024, compared to 6.8 per cent in March 2023. Sectoral experts have argued that incidence of NPA has grown in recent years, especially after the Covid pandemic.