RBI Urged to Extend Stress Loan Period for Small Businesses

By Tanya Yadav --
Tuesday, 09 Jul, 2024

Micro, small and medium-sized enterprises (MSMEs) in India are calling for changes to how banks classify stressed loans. They want the Reserve Bank of India (RBI) to give businesses more time before their loans are labeled as troubled.

Currently, if a business is late on loan payments for 61-90 days, their account is put in a category called SMA-2 (Special Mention Account-2). This can make it hard for them to get more credit. MSMEs are asking the RBI to extend this period to 180 days.

The issue was discussed at a recent meeting in Mumbai between RBI officials and various industry associations. The India SME Forum was among those present.

Mr. Vinod Kumar, President, India SME Forum, explained why the current system is problematic. He said it can take an SME 40-45 days to make a product, and up to 200 days to sell it and get paid. This makes it difficult to repay loans within 90 days while still running the business. He added “the current system, meant to help businesses showing early signs of trouble, actually ends up restricting their access to credit when they need it most. The moment an MSME goes SMA-0, the banker will single it out and block access to credit. Instead of actually supporting the business, you've blindfolded it and kept it outside in the rain."

The India SME Forum urges the RBI to reconsider how it defines a "willful defaulter" for small businesses. They believe the current definition is too broad and doesn't consider factors like a company's financial health or history of loan renewals.

These changes, if implemented, could help small businesses manage their finances better and access credit more easily during challenging times. The RBI's response to these proposals is yet to be seen.

RBI Urged to Extend Stress Loan Period for Small Businesses. Micro, small and medium-sized enterprises (MSMEs) in India are calling for changes to how banks classify stressed loans. They want the Reserve Bank of India (RBI) to give businesses more time before their loans are labeled as troubled.

Currently, if a business is late on loan payments for 61-90 days, their account is put in a category called SMA-2 (Special Mention Account-2). This can make it hard for them to get more credit. MSMEs are asking the RBI to extend this period to 180 days.

The issue was discussed at a recent meeting in Mumbai between RBI officials and various industry associations. The India SME Forum was among those present.

Mr. Vinod Kumar, President, India SME Forum, explained why the current system is problematic. He said it can take an SME 40-45 days to make a product, and up to 200 days to sell it and get paid. This makes it difficult to repay loans within 90 days while still running the business. He added “the current system, meant to help businesses showing early signs of trouble, actually ends up restricting their access to credit when they need it most. The moment an MSME goes SMA-0, the banker will single it out and block access to credit. Instead of actually supporting the business, you've blindfolded it and kept it outside in the rain."

The India SME Forum urges the RBI to reconsider how it defines a "willful defaulter" for small businesses. They believe the current definition is too broad and doesn't consider factors like a company's financial health or history of loan renewals.

These changes, if implemented, could help small businesses manage their finances better and access credit more easily during challenging times. The RBI's response to these proposals is yet to be seen.