Govt may seek RBI move to relax NPA norms to cushion MSMEs from war impact

The plan involves regulatory relaxations, including on special mention account (SMA) and non-performing asset (NPA) classification timelines, effectively giving micro, small and medium enterprises (MSMEs) more time before their loans are tagged as stressed or bad, two persons aware of the matter said.

Currently, loans are classified as special mention accounts based on the number of days they remain overdue. These include SMA 0 (1 to 30 days), SMA 1 (31 to 60 days) and SMA 2 (61 to 90 days) as early warning indicators of stress. If the overdue period exceeds 90 days, the loan is classified as a non-performing asset. During the covid-19 pandemic, the Reserve Bank of India (RBI) had temporarily extended the NPA classification period from 90 days to 180 days.

The move is part of the government’s comprehensive plan to roll out a ₹2.5 trillion relief package, including credit guarantees for MSMEs amid feedback from banks indicating potential stress in their MSME portfolios starting Q1 FY27, the persons cited above said, requesting anonymity.

The current environment, shaped by the West Asia crisis, is creating conditions similar to the covid-19 period, warranting a closer look at relief measures. This assumes significance given that the MSME sector contributes about 30.1% to India’s gross domestic product (GDP) and accounts for 35.4% of manufacturing output and nearly 45% of India’s merchandise exports.

MSME borrowers have increasingly approached lenders seeking relief measures, citing business disruptions from the West Asia war. Officials of the RBI, the MSME ministry, the Department of Financial Services (DFS), the Department of Expenditure (DoE) and industry groups met on Wednesday to discuss the situation.

“Since the current situation is similar to the covid-19 period, the government may consider extending the NPA recognition period and easing Special Mention Account (SMA) norms as part of relief measures for the sector,” said the first person.

The second person cited earlier said that the government has been receiving continuous feedback from banks, indicating the possibility of stress in the first quarter of FY27. “There has been substantial feedback from MSME customers through banks, and these relaxations in NPA norms are being considered to ease that pressure,” this person said.

Queries emailed to the ministries of finance and MSME, as well as to the RBI remained unanswered till press time.

Experts said there is a need for government intervention to ease the financial stress on MSMEs.

“Early policy support is critical in such situations, as delays can allow temporary disruptions to turn into structural damage. If MSME clusters lose workers, supply linkages and production capacity, restoring them later becomes significantly more costly and time-consuming. A timely and targeted response can help contain the impact and preserve the productive base of the economy,” said Rakesh Arrawatia, professor at the Institute of Rural Management Anand (IRMA), Gujarat.

According to the RBI data, total advances by scheduled commercial banks (SCBs) to the MSME sector stood at ₹35.83 trillion, while gross NPAs were ₹1.17 trillion as of 30 September 2025, representing 3.27% of total advances.

Industry representatives say that small businesses are facing a global challenge.

“India’s MSMEs are not facing an isolated challenge, but a convergence of global disruptions affecting energy, labour, finance and trade. The present challenge is not merely a matter of rising input costs. In several clusters, energy stress is now beginning to affect worker subsistence and labour continuity. Where production is irregular and living costs are rising, migrant workers begin to reassess the viability of staying in urban industrial centres. This creates a slow but serious risk for MSME clusters that depend on concentrated pools of skilled and semi-skilled migrant labour,” said Vinod Kumar, president, India SME Forum.

“A calibrated response today would be far less costly than rebuilding disrupted production ecosystems tomorrow,” said Kumar.