Prominent MSME representative body Federation of Indian Micro and Small & Medium Enterprises (FISME) has urged the government for a comprehensive policy response to the existing Special Mention Account (SMA) framework to help revive MSME accounts with incipient stress.
In its recommendations for the upcoming budget, FISME said the SMA framework should not stop just at the identification of stressed accounts and halting of banking operations of the accounts but must also posit suitable guidelines for their revival.
“SMA framework, a handiwork of Raghuram Rajan, has serious flaws. We are flooded with complaints that instead of reviving struggling MSMEs, the framework in fact is leading to premature closures,” FISME said in its recommendations.
The issue with the SMA framework is that it lacks a mechanism to consider the qualitative reasons for the delay in loan repayment by the MSME. FISME said once red-flagged, the MSME account becomes a pariah and banks restrict, even withdraw, banking facilities, bringing banking operations of the unit to a grinding halt.
“Post SMA mark, there is no guidance on what the bank manager has to do next for MSME revival. The account is allowed to slip into NPA. Once NPA, the bank moves to recover money by selling assets.”
After last year’s budget, RBI held consultations with MSME associations. What it came out with was a proposal for a fund to provide an additional 10 per cent loan for revival. FISME said this response was not even close to a halfway house.
The federation requested that the quantum of funds for supporting the revival of SMA accounts should be based on the need and not rigidly pegged at 10 per cent.
Another issue raised by FISME in its recommendations was related to BLR (bank loan ratings). BLR in India is a measure of the creditworthiness of an individual or organization regarding their ability to repay a bank loan.
This rating is issued by credit rating agencies, such as CRISIL, ICRA, CARE Ratings, and others, based on a detailed evaluation of financial performance, credit history, and other risk factors.
The ratings are also applicable to MSMEs and unlisted entities. Borrowers with higher BLR are considered less risky and can secure loans at more favourable interest rates. However, for MSMEs, BLR is challenging because, unlike large enterprises, small businesses often lack robust financial records, face high costs for ratings, and are perceived as high-risk due to their small-scale and sectoral volatility.
Moreover, BLR often favours larger, well-established entities with stable financials, leaving MSMEs at a disadvantage.
The announcement in the last budget that PSU banks would be encouraged to develop their own credit assessment models was seen as a nudge to banks to abandon the use of BLR.
However, the lack of explicit RBI guidelines on the issue has allowed the practice to continue, more or less, FISME said as it called for guidelines to be issued by the Reserve Bank of India (RBI) for banks and other financial institutions that MSMEs and unlisted companies do not mandatorily require BLR.
Other key recommendations by FISME for the upcoming budget were:
- Encouraging banks to consider need-based financing as an independent mode of financing MSMEs using a combination of need-based assessment with cash flow analysis.
- Nudging banks to significantly reduce collateral for enhancing limits of asset-heavy or high turnover type MSMEs if the companies show good conduct over a sufficiently long period.
- Mandating EXIM Bank to provide packing credit at least against LC (letter of credit) backed orders, irrespective of the percentage of exports of total sales.
