NEW DELHI: In a recent presentation to the Department for Promotion of Industry and Internal Trade (DPIIT) on Budget, the Federation of Indian Micro and Small & Medium Enterprises (FISME) highlighted concerns pertaining to the mechanism for non-performing assets (NPA) classification, which has proven to be detrimental to MSMEs recovering from the Covid-19 pandemic.
According to it, the current policy by the Reserve Bank of India (RBI) on NPA classification has been criticised for its stringent criteria, leading to false alarms and forced closures of MSMEs.
According to the policy, banks are required to put accounts with exposure of Rs 5 cr (fund plus non fund) into three categories: SMA-0 (if account showed signs of incipient stress even if principal/ interest not overdue for more than 30 days); SMA-1 (if principal/ interest payment overdue for 31-60 days) and SMA-2(If principal/ interest payment overdue for 61-180 days).
“A red flag is raised even if principal/ interest payments get delayed by 30 days. Once an account figures in SMA, the account becomes a pariah both inside as well as outside the bank bringing even the normal banking operations to a grinding halt. This is creating false alarms and even resulting into forced closure,” FISME highlighted in its presentation.
FISME emphasised the need for a review of the SMA framework and advocated for a liberal restructuring option for MSMEs affected by long Covid and geopolitical turmoil.
FISME highlighted challenges related to Bank Loan Ratings (BLR) for MSMEs, emphasizing the adverse impact of third-party ratings on the sector.
The organisation called for the abolishment of Bank Loan Ratings, citing the limitations it imposes on the growth potential of small and medium enterprises by hindering their ability to raise capital for expansion. If the exposure of banks to an MSME account is beyond a threshold, banks insist on getting a third-party rating known as bank loan rating (BLR) from RBI/SEBI approved rating agencies.
“The trigger, according to Reserve Bank of India (RBI), was Basel-II norms but had clarified to FISME that it was not mandatory and was an advisory for banks to use external rating agencies till they have capacity to develop their own risk assessment models. The practice continues,” FISME stated.
The problem is that these agencies are using the same methods for both big and small businesses, which isn’t working well for small businesses. It said because of this practice, small businesses are getting low ratings, which leads to them having to pay higher interest rates and provide more collateral to get loans.