Chief Economic Advisor V. Anantha Nageswaran has called for a more tailored approach to non-performing asset classification for micro, small and medium enterprises, arguing that current norms do not adequately reflect the realities of how smaller businesses operate. Speaking in the context of India's credit architecture, Nageswaran said the existing framework was built around assumptions that may fit large corporate borrowers or globally standardised banking models, but not the irregular cash conversion cycles and working capital dependence that define much of the MSME sector.
MSME Credit Reality
Nageswaran's intervention comes at a time when lenders and policymakers are increasingly focused on the quality of credit flowing to smaller enterprises, which remain central to employment generation, industrial supply chains and domestic manufacturing. MSMEs often face delayed receivables, seasonal demand swings and uneven order books, all of which can create temporary stress in repayment even when the underlying business remains viable. Under a rigid classification system, such businesses can be pushed into delinquency too quickly, potentially triggering a chain of consequences that includes higher borrowing costs, tighter credit limits and reduced access to formal finance.
The Chief Economic Advisor's remarks underscore a long-standing tension in India's banking system: the need to maintain prudential discipline while avoiding rules that unintentionally penalise productive borrowers. In practice, loan classification norms are designed to protect banks from asset-quality deterioration and to ensure early recognition of stress. But when applied uniformly across borrower categories, they can fail to distinguish between structural weakness and short-term liquidity mismatch. For MSMEs, that distinction is critical because many firms rely on working capital cycles that are far more volatile than those of larger companies.
Why Uniform Rules Fall Short
Nageswaran argued that a global or standardised framework is not always suitable for India's business environment. That view reflects the diversity of the country's enterprise base, where a large share of firms operate with thin margins, limited collateral and highly uneven payment timelines. In such a setting, a blanket approach to NPA recognition can amplify stress rather than resolve it, especially if lenders become overly cautious in response to classification risk.
His comments also point to a broader policy debate over whether India should adapt financial regulation more closely to domestic market structure. While international norms provide a useful benchmark, they are often calibrated to economies with different payment cultures, supply-chain practices and formalisation levels. India's MSME sector, in particular, is deeply embedded in informal and semi-formal commercial networks, where delayed payments from buyers can create temporary strain without necessarily indicating borrower failure. A more nuanced framework, advocates argue, could allow banks to identify genuine distress while giving viable firms room to recover.
Compliance Costs Under Scrutiny
Alongside the call for revised NPA norms, Nageswaran highlighted the need to reduce compliance costs for MSMEs. That issue has become increasingly important as smaller firms navigate a dense web of tax filings, labour regulations, documentation requirements and lender reporting obligations. For businesses with limited administrative capacity, compliance can consume time and capital that might otherwise be deployed toward production, hiring or market expansion.
Lowering these costs, he suggested, would improve operational efficiency and help MSMEs function with greater resilience. The argument is not merely administrative; it has direct implications for credit quality. Firms that spend less on regulatory overhead may be better positioned to manage working capital, service debt and withstand demand shocks. For lenders, that could translate into healthier loan books over time, provided the regulatory framework is calibrated to distinguish between temporary cash flow stress and deeper solvency problems.
The remarks are likely to resonate with banks, non-bank lenders and policy officials weighing how best to expand credit to smaller businesses without compromising asset quality. They also arrive against the backdrop of a broader push to deepen formal finance for the MSME segment, which is widely seen as essential to India's growth, manufacturing competitiveness and job creation. Nageswaran's pitch suggests that the next phase of reform may need to focus less on applying uniform rules and more on designing credit norms that reflect the operating realities of Indian enterprise.