Chief Economic Adviser V. Anantha Nageswaran has argued that India should rethink how banks classify loans to micro, small and medium enterprises, saying the current non-performing asset framework does not adequately account for the sector's uneven cash-flow patterns and working-capital demands. His remarks add weight to a long-running debate over whether India's credit rules, largely designed around broad prudential standards, are too rigid for smaller businesses that often operate on seasonal revenues, delayed receivables and thin liquidity buffers.
MSME Credit Reality
Nageswaran's central point is that MSMEs cannot be treated as a homogeneous borrower class. Unlike large corporates with diversified revenue streams and dedicated treasury functions, small firms often depend on short operating cycles, customer payment delays and inventory turnover that can fluctuate sharply by sector and geography. In that context, a one-size-fits-all approach to NPA recognition can push otherwise viable firms into stress classification too quickly, tightening their access to fresh credit at the very moment they need it most.
The CEA's intervention is significant because it comes at a time when policymakers are trying to balance financial stability with the need to expand credit to productive small businesses. Banks remain cautious about lending to MSMEs because of higher perceived risk, documentation gaps and recovery challenges. Yet the sector is central to employment generation, supply chains and local manufacturing, making its financing conditions a matter of broader economic policy rather than a narrow banking issue.
Global Rules, Local Markets
Nageswaran also questioned the suitability of a uniform global framework for India's business environment. The implication is not that prudential discipline should be weakened, but that regulatory design must reflect how Indian enterprises actually operate. Many MSMEs are embedded in informal or semi-formal ecosystems, where payment cycles may be longer than standard loan repayment schedules and working capital needs can vary with procurement patterns, monsoon-linked demand or festival-season sales.
That mismatch can create a structural problem: a borrower may be technically overdue under a standard classification rule even if the underlying business remains viable and capable of recovery with temporary support. For lenders, the result is a tension between compliance and commercial judgment. For borrowers, it can mean reduced credit lines, higher borrowing costs and a greater reliance on informal finance. Nageswaran's remarks suggest that policy makers should consider whether the current framework is inadvertently amplifying stress in a segment that is supposed to be a priority for formal finance.
Compliance Burden Matters
Beyond NPA norms, the Chief Economic Adviser highlighted the need to reduce compliance costs for MSMEs. That point is increasingly relevant as smaller firms face a dense web of tax filings, labour rules, digital reporting requirements and lender documentation. While formalisation has brought benefits in transparency and market access, it has also imposed administrative burdens that can be disproportionately heavy for firms with limited staff and weak back-office systems.
Lower compliance costs, in Nageswaran's framing, would not merely ease paperwork. They could improve operational efficiency by freeing managerial time, reducing the need for external consultants and allowing business owners to focus on production, sales and cash collection. For lenders as well, simpler and more predictable compliance environments can improve information quality, making credit assessment more accurate and potentially lowering the cost of underwriting.
The remarks are likely to resonate with industry participants who have long argued that MSME finance requires tailored rules rather than imported templates. They also place renewed attention on the policy trade-off between prudential caution and credit expansion. If India wants small businesses to scale, formal finance must be designed around their operating realities, not only around global regulatory orthodoxy.
The broader message from Nageswaran is that MSME lending policy should be calibrated to support enterprise resilience, not penalise the cash-flow volatility that is intrinsic to small business activity. In a credit system where access to working capital can determine whether a firm survives a temporary slowdown, the design of NPA norms may be as important as the volume of credit itself.