MSME bodies urge RBI to double threshold period for SMA-2 stressed loan accounts

Before a loan account turns into an NPA (non-performing assets), banks are required to identify incipient stress in the account by creating a sub-asset category called special mention accounts (SMA). 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 overdue between 31-60 days); and SMA-2 (when principal or interest payment overdue between 61-90 days).

When an account is under SMA category, MSME borrowers cannot utilize existing credit lines to pay dues, hindering recovery efforts, the association said.

The meeting, held in Mumbai at the RBI’s invitation, was presided over by Deputy Governors M Rajeshwar Rao and J Swaminathan.

Representatives from MSME bodies including the India SME Forum, the Federation of Indian Micro and Small & Medium Enterprises (FISME), and Laghu Udyog Bharti attended the session. There was broad consensus among bodies to double the SMA-2 period to 180 days.

According to Vinod Kumar, President of the India SME Forum, the current SMA classifications, instead of supporting businesses, effectively restricts MSMEs access to credit at crucial times. An MSME can take anywhere between 40 to 45 days to manufacture a product. Then, to put it in the market and to get the money, it can take as long as 200 days. Paying within 90 days is difficult when it has to keep on feeding its operations, he said.

“You have a mechanism to help the MSME– during incipient stress, nominate it as SMA-0. But 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,” Kumar explained.

“A revised SMA framework with extended timelines, SOPs for bank intervention, and a more pragmatic definition of ‘willful defaulter’ is crucial to support MSMEs. Additionally, data collection by RBI will enable a comprehensive understanding of the challenges faced by MSMEs and facilitate the development of targeted solutions,” the association said. FISME urged the RBI to review the wilful defaulter definition, which is currently overly broad, and proposed a more nuanced approach, considering factors like current ratios and past loan renewals.

The industry association also advocated for 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.