Chief Economic Advisor pitches for MSME-specific approach to NPA classification norms

Chief Economic Advisor V Anantha Nageswaran on Friday called for a review of the nonperforming asset NPA classification norms for micro small and medium enterprises MSMEs by the Reserve Bank of India RBI saying the rules should follow the cash flow patterns according to news agency PTIHe pointed out that MSMEs across sectors have different working capital requirements and cash flow cycles and added that the Finance Ministry has been advocating a review of the normsUnder the existing framework loan accounts are classified as Special Mention Accounts SMA based on the period of overdue payments with categories corresponding to 30 days 60 days and 90 days according to PTI An account is generally classified as a nonperforming asset if interest or principal remains overdue for more than 90 daysNageswaran said the transition to SMA classification itself can have significant consequences for borrowers with businesses potentially facing difficulties even before their accounts are formally classified as NPAsThe moment you are classified as SMA then you almost end up becoming already de facto if not de jure he saidPushes for norms based on cash flowHe said the financial regulators rules should reflect domestic business practices and cash flow patterns rather than adopting a globally uniform frameworkWe need to evolve such norms consistent with our practices and cash flow patterns rather than adopting a globally uniform pattern These would be some of the things we need to do for the MSME sector which is a big employment generator he saidMSME faces disproportionately higher compliance burdenNageswaran further said ease of doing business impacts MSMEs more than large businesses and smaller businesses face a disproportionately high compliance burden in terms of both financial expenses and timeEasing this burden would allow smaller businesses to focus their limited resources and time on core operations and expanding their workforce thereby creating jobs and delivering tangible benefits at the grassroots level he saidHe said the MSME growth should focus on deregulation skill development greater utilisation of trade agreements and adopting diverse development models suited to the specific needs and circumstances of different statesHe added that government under the leadership of the Cabinet Secretary has also been pursuing deregulation at the grassroots level for MSMEs over the past nearly two yearsIndia should leverage Free Trade AgreementsNageswaran said India needs to take advantage of the various Free Trade Agreement FTA and other trade agreementsWe have to leverage the trade agreements we are signingthere is good news that the UK agreement and the European Union agreement which is going to become operational in two months both give enormous scope for goods and services of India to reach their markets And we have to go all out to ensure that we take advantage of it he saidMicrofinance InstitutionsThe Chief Economic Advisor said microfinance institutions must avoid overlending especially amid the proliferation of artificial intelligence AI technology and digital sellingI think from a pure finance perspective the priority should be savings insurance and then credit but the sector usually has reversed the order and that is not the right sequence And then there have been frequent bouts of overlending and misselling and this should be avoided he saidOn AI he said AI may actually end up making us realise that our skill and our strength are in labourintensive growth given the labour endowment of this country and the demographic sweet spot we are inWith inputs from PTI