Chief Economic Advisor V. Anantha Nageswaran has made a pointed case for reworking India's non-performing asset classification framework for micro, small and medium enterprises, arguing that the current system does not adequately reflect the sector's uneven cash flows, working capital intensity and operating rhythms.
MSME Credit Reality
Speaking in the context of India's banking and credit architecture, Nageswaran said a one-size-fits-all framework is poorly suited to the way smaller businesses function. MSMEs often depend on irregular receivables, seasonal demand and short-term borrowing to finance inventory and payroll, he noted, meaning that a rigid delinquency standard can overstate stress in businesses that are fundamentally viable but temporarily strained.
His remarks go to the heart of a long-running policy debate: whether India's prudential norms, designed to preserve banking stability, are too blunt when applied to smaller enterprises that operate with thinner margins and more volatile cash conversion cycles. In practice, an account can slip into the non-performing category after a missed repayment threshold even when the borrower's underlying business remains active and the delay stems from delayed customer payments rather than structural weakness.
Global Norms, Local Fit
Nageswaran's intervention also underscored a broader concern among policymakers that international banking templates cannot simply be transplanted into India's economic environment. Global frameworks tend to assume more formalized billing cycles, deeper financial buffers and more predictable payment behavior than is often available to Indian MSMEs, especially those embedded in fragmented supply chains.
The Chief Economic Advisor's argument is significant because it frames the issue not as a relaxation of discipline, but as a calibration problem. In his view, the objective should be to distinguish between temporary liquidity stress and genuine credit deterioration, so that banks are not forced to treat every payment delay as evidence of default. Such a distinction could, in theory, improve the quality of credit assessment and reduce the risk of penalizing otherwise productive firms.
That position is likely to resonate with lenders and industry groups that have long argued that smaller firms are disproportionately affected by compliance-heavy lending rules. At the same time, any move to alter NPA classification norms would need to preserve transparency and guard against evergreening, where weak loans are repeatedly restructured or masked to avoid recognition of stress.
Compliance Costs Matter
Alongside the call for revised asset classification, Nageswaran also emphasized the need to reduce compliance costs for MSMEs. That point is especially relevant in a sector that often lacks dedicated legal, accounting and regulatory teams, forcing owners to spend time and money on paperwork that larger firms can absorb more easily.
Lower compliance costs, he suggested, would improve operational efficiency by allowing entrepreneurs to focus more on production, sales and working capital management. In the policy context, this is not merely an administrative issue. Excessive compliance can raise the effective cost of credit, slow formalization and discourage smaller firms from expanding into the regulated financial system.
For banks and non-bank lenders, the message is equally clear: credit policy for MSMEs cannot be separated from the broader business environment in which these firms operate. If compliance burdens remain high and repayment norms remain inflexible, lenders may continue to price in higher risk, which in turn can restrict access to affordable finance.
The remarks arrive at a time when India is trying to deepen formal credit penetration while keeping the financial system stable. MSMEs remain central to employment generation and supply-chain resilience, but they are also among the most vulnerable to cash-flow shocks. Nageswaran's comments suggest that policy support for the sector may increasingly hinge on smarter differentiation rather than blanket rules.
The broader implication is that India's banking framework may need to become more nuanced if it is to support growth without weakening prudential oversight. For MSMEs, that could mean a system that recognizes business reality more accurately, eases unnecessary friction and gives viable firms a better chance to stay current on debt obligations without being prematurely branded as distressed.