Chief Economic Adviser V. Anantha Nageswaran has made a pointed case for tailoring India's loan classification rules to the realities of the micro, small and medium enterprise sector, arguing that current non-performing asset norms are too rigid for businesses whose cash flows often move in cycles rather than in steady monthly patterns.
MSME Cash Flow Reality
Speaking on the broader policy challenge facing smaller businesses, Nageswaran said the existing framework does not adequately account for the diversity of MSME operating models, especially the uneven timing of receivables, inventory cycles and working capital requirements. In his view, a uniform global template for asset classification may work in systems built around more predictable payment structures, but it can misread the financial stress of Indian enterprises that depend on seasonal demand, delayed customer payments and short-term borrowing to keep operations running.
The remarks are significant because NPA classification norms determine when a loan is treated as stressed and can trigger stricter provisioning by lenders. For MSMEs, which often operate with thin margins and limited liquidity buffers, even temporary disruptions in cash flow can lead to accounts being tagged as delinquent under rules that are not calibrated to business-specific realities. Nageswaran's intervention therefore adds weight to a long-running debate over whether India's credit architecture should distinguish more clearly between large corporate borrowers and smaller firms with fundamentally different repayment patterns.
Compliance Burden And Credit
Alongside the call for revised asset classification norms, the Chief Economic Adviser also highlighted the burden of compliance costs on MSMEs, saying that reducing regulatory friction would improve operational efficiency. The point is especially relevant for a sector that accounts for a large share of employment and industrial activity, yet often lacks the administrative capacity to absorb repeated reporting requirements, documentation demands and procedural delays.
Lower compliance costs, in policy terms, can mean simpler filings, fewer duplicative disclosures, faster approvals and more predictable interactions with lenders and regulators. For small firms, these changes can free up managerial time and working capital, both of which are often in short supply. Nageswaran's comments suggest that credit reform and compliance reform should be viewed together rather than as separate policy silos, since the cost of regulation can directly affect a borrower's ability to service debt.
The remarks also come at a time when policymakers are trying to balance financial stability with credit expansion. Banks and non-banking lenders remain cautious about small-business lending because of perceived risk, documentation gaps and recovery challenges. At the same time, policymakers want to deepen formal credit access for MSMEs, which are widely seen as essential to job creation, supply-chain resilience and domestic manufacturing growth. A more nuanced NPA framework could, in theory, reduce the risk of unnecessary stress classification while still preserving prudential discipline.
Policy Balancing Act
Nageswaran's position underscores a broader economic question: how to design regulation that protects the banking system without penalising businesses for the very features that define their operating model. MSMEs often face delayed payments from larger buyers, volatile input costs and seasonal demand swings, all of which can distort standard repayment metrics. If classification rules are too blunt, lenders may become overly conservative, restricting credit to firms that are viable but temporarily strained.
At the same time, any relaxation in norms would need to be carefully structured to avoid masking genuine asset quality problems. That makes the policy challenge one of calibration rather than wholesale dilution. The issue is not whether prudential rules should exist, but whether they should better reflect the cash-flow patterns and working-capital cycles of smaller enterprises.
For the banking sector, the debate has implications beyond MSME lending alone. A more differentiated approach could influence how lenders assess risk, structure repayment schedules and design products for small businesses. For fintech lenders and digital credit platforms, too, the message is clear: underwriting models that rely on standardised repayment assumptions may need to evolve if they are to serve India's fragmented small-business economy more effectively.
Nageswaran's comments are likely to feed into continuing policy discussions on how to improve the flow of formal credit to smaller firms without weakening the integrity of the financial system. The central message is that India's MSMEs cannot be judged by a template designed for more uniform business cycles. If policymakers want the sector to scale, they may need rules that recognise how Indian small businesses actually earn, borrow and repay.