In a meeting held in Mumbai at the invitation of the Reserve Bank of India (RBI), MSME bodies, including the Federation of Indian Micro and Small & Medium Enterprises (FISME), urged the RBI to extend the threshold period for stressed loan accounts under the special mention account-2 (SMA-2) category from the current 90 days to 180 days. The meeting was presided over by Deputy Governors M Rajeshwar Rao and J Swaminathan.  FISME also called for a review of the definition of wilful defaulter for MSMEs.

"The current SMA classification triggers penal actions even for minor delays (SMA-0), impacting credit scores (SMA-1), and restricting credit access (SMA-2). This rigidity disregards genuine reasons for delays, such as late payments from buyers," FISME stated in a memo on the meeting with RBI officials.  Banks are required to identify early stress in loan accounts by categorising them as special mention accounts (SMA) before they turn into non-performing assets (NPA).

An account is classified as SMA when there are early signs of sickness or irregularities in loan repayment: - SMA-0: Principal or interest payment is not overdue for more than 30 days but shows signs of stress.

- SMA-1: Principal or interest payment is overdue between 31-60 days.

- SMA-2: Principal or interest payment is overdue between 61-90 days.  MSME borrowers cannot utilise existing credit lines to pay dues when their accounts are classified under the SMA category, hindering their recovery efforts.  

Representatives from various MSME bodies, including the India SME Forum, FISME, and Laghu Udyog Bharti, attended the session. There was a broad consensus to double the SMA-2 period to 180 days.  

Vinod Kumar, President, India SME Forum, highlighted the challenges faced by MSMEs due to the current SMA classifications, which restrict their access to credit at crucial times. "An MSME can take anywhere between 40 to 45 days to manufacture a product. Then, it can take as long as 200 days to market and get paid for the product. Paying within 90 days is difficult when operations need to be continually funded," he explained.  

Kumar criticised the current mechanism, stating that instead of supporting businesses during incipient stress by nominating them as SMA-0, bankers often single them out and block access to credit.  FISME emphasised the need for a revised SMA framework with extended timelines, standard operating procedures (SOPs) for bank intervention, and a more pragmatic definition of 'wilful defaulter' to support MSMEs.

The association also suggested that the RBI should collect data to better understand the challenges faced by MSMEs and develop targeted solutions.  Additionally, FISME proposed easing credit norms for export-oriented MSMEs, suggesting that Letters of Credit issued by banks should be considered sufficient security for extending additional credit for export-related inputs.

(Source: Indian Express)