
SMA Classification: A Burden on MSMEs, Says CEA V. Anantha Nageswaran
The Special Mention Account (SMA) classification, originally designed to assist MSMEs in recovering before their accounts transitioned into non-performing assets (NPAs), has instead created additional challenges for the sector.
The government has prioritized aiding financially distressed MSMEs, particularly those falling under the SMA banking category. However, the SMA tagging system, which was supposed to act as a preventive measure, has often backfired. Chief Economic Advisor (CEA) V. Anantha Nageswaran noted during the Sankalp Summit in Varanasi that categorizing an account as SMA 1 effectively makes it untouchable for further financial assistance. “The intent was to support MSMEs before they became bad assets, but the SMA tag itself leads to banks ceasing further lending, defeating the purpose of early intervention,” he said.
As of March 31, 2024, scheduled commercial banks (SCBs) had ₹28.04 lakh crore in outstanding credit to the MSME sector. Of this, NPAs totaled ₹1.25 lakh crore, resulting in a gross NPA ratio of 4.46% for MSMEs—substantially higher than the 2.74% gross NPA ratio across all loans, as reported by Minister of State for Finance Pankaj Chaudhary. Banks wrote off ₹20,261 crore in bad loans from micro and small enterprises in the past fiscal year, compared to ₹28,392 crore the previous year.
MSME industry bodies have urged the Reserve Bank of India (RBI) to extend the threshold for stressed accounts under the SMA-2 category from 90 days to 180 days. Additionally, they advocate for a reassessment of the “wilful defaulter” definition, arguing that minor payment delays unfairly tarnish the credit scores of small businesses under the current rigid framework.
Under the SMA system, loans are classified into three categories based on payment delays:
- SMA 0: Payments not overdue by more than 30 days but exhibiting early stress.
- SMA 1: Payments overdue by 31–60 days.
- SMA 2: Payments overdue by 61–90 days.
Accounts overdue beyond 90 days transition to "sub-standard" status, the first step toward being classified as NPAs.
In response to these challenges, the government is developing credit guarantee schemes tailored for manufacturing MSMEs, with specific provisions for SMA 1 and SMA 2 accounts. Additionally, steps are being taken to alleviate the over-regulation stifling the growth of MSMEs.
Recognizing the critical role of MSMEs in job creation and economic growth, efforts include redefining MSME classifications, improving access to finance through receivables exchanges, and encouraging banks to use internal credit models over external ratings for lending decisions. The Emergency Credit Line Guarantee Scheme, introduced during the pandemic, has also provided vital relief to MSMEs.
CEA Nageswaran emphasized the need for significant deregulation, stating, “The burden of bureaucracy on MSMEs is still overwhelming. Deregulation is the key to unlocking their potential.”
By addressing these structural and financial barriers, the government aims to ensure MSMEs can thrive and contribute effectively to the economy.