CEA Nageswaran urges RBI to rethink 90-day bad-loan rule for small businesses
Representative image: jannonivergall / Pixabay
Chief Economic Adviser V. Anantha Nageswaran on October 9 asked the RBI to review the uniform 90-day NPA and SMA norms for MSME loans, citing varied cash-flow cycles.
What Happened
Chief Economic Adviser V. Anantha Nageswaran has asked the Reserve Bank of India to rethink how loans to micro, small and medium enterprises (MSMEs) are flagged as stressed or bad. Speaking at the national conference of Sa-Dhan, an association of microfinance and community lenders, on Friday, October 9, 2026, he said the single 90-day overdue rule used to classify loans does not suit MSMEs because businesses in different sectors have very different working-capital cycles. He argued that once a borrower is placed in the "special mention account" (SMA) category, the loan is treated almost as a non-performing asset in practice, and said that needed to change. He called for norms based on how small businesses actually earn and pay, rather than a uniform global benchmark.
Key Facts
- Who spoke: Chief Economic Adviser V. Anantha Nageswaran, at Sa-Dhan's national conference on October 9, 2026.
- His main point: a uniform 90-day overdue threshold is not suitable for all MSMEs, which operate across sectors with different working-capital cycles.
- Under current RBI rules, loans overdue up to 30 days are SMA-0, 31 to 60 days SMA-1 and 61 to 90 days SMA-2.
- A loan becomes a non-performing asset (NPA) once it is overdue for more than 90 days.
- He said being classified as SMA is "almost de facto, if not de jure" the same as being an NPA for a borrower.
- He asked for MSME loan norms tailored to actual business practices and cash-flow patterns.
- The remarks are a call for review; the RBI has not announced any change.
Why It Matters
MSMEs are a large source of jobs and output in India, and many of them depend on bank and non-bank credit to buy raw materials and pay wages while they wait for customers to pay. Their income often comes in lumps: a seasonal business may earn most of its money in a few months, and a supplier to a large company may wait weeks or months for payment. A rule that starts counting a loan as stressed after 30 days and as bad after 90 days can catch firms that are healthy but simply operate on a longer cycle.
The SMA label matters more than its name suggests. Lenders use it as an early warning, but the CEA's point is that in practice it can make banks cautious about lending further to a borrower, cutting off working capital exactly when a small firm needs it. That can push a temporary cash crunch into a real default.
There is another side to the debate. NPA rules exist so that banks recognise problems early and set aside money for possible losses, and loosening them risks hiding bad loans. Bankers note that the RBI has traditionally been cautious about changing classification norms. Any change would need to separate firms with long but predictable payment cycles from those in genuine distress.
The suggestion carries weight because it comes from the government's top economic adviser. It adds to a wider discussion on how to keep credit flowing to small businesses at a time when interest rates have risen and many firms face higher costs.
| Category | Days overdue |
|---|---|
| SMA-0 | Up to 30 days |
| SMA-1 | 31 to 60 days |
| SMA-2 | 61 to 90 days |
| NPA | More than 90 days |
Impact
Short-term: No rule changes immediately. The remarks are likely to feed into discussions between the government, the RBI and lenders on MSME credit.
Long-term: If the RBI accepts the idea, sector-specific or cash-flow-based classification could give small firms with long payment cycles more room before being flagged, while banks would need clear safeguards against hiding real defaults.
Who is affected: Owners of small and medium businesses that borrow for working capital, banks, NBFCs and microfinance lenders, and the RBI as regulator.
Key Takeaway
The Chief Economic Adviser wants the RBI to stop applying one 90-day clock to all small-business loans and to judge stress by each sector's real cash-flow cycle.
Questions and Answers
What did the Chief Economic Adviser say about MSME loans?
On October 9, 2026, V. Anantha Nageswaran said the uniform 90-day rule for classifying overdue loans does not fit MSMEs, whose sectors have different working-capital cycles, and asked the RBI to consider norms based on actual cash-flow patterns.
What is a special mention account (SMA)?
It is the RBI's early-warning category for loans that are overdue but not yet bad: SMA-0 up to 30 days, SMA-1 from 31 to 60 days and SMA-2 from 61 to 90 days.
When does a loan become an NPA?
Under RBI norms, a loan becomes a non-performing asset when payments are overdue for more than 90 days.
Has the RBI changed the rules for MSMEs?
No. The CEA's remarks are a call for review. The RBI has not announced any change, and it has traditionally been cautious about altering loan classification norms.
Disclaimer: Prepared by the Peepals newsroom from publicly available sources with AI assistance. Information is accurate to the best of our knowledge at the time of publication and may change. Images may be representative. Not professional advice. Report an error via our contact page.
Sourced and fact-checked by the Peepals Global Editorial Team
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