For small businesses struggling with debt, some relief may be on way
More time to repay loans before SMA label kicks in, a waiver of penalties, and a digital platform to smoothen debt restructuring - That's what the Union budget may have in store for MSMEs struggling to repay debt.
NEW DELHI : Hope is around the corner for millions of small businesses struggling with debt, with the Union budget likely to propose longer repayment timelines, penalty waivers and a digital platform to ease loan restructuring.
The union ministries of finance and MSME are updating the decade-old framework for revival and restructuring (FRR) for micro, small, and medium enterprises (MSMEs), two people aware of the plan said. The new framework, called FRR 2.0, is aimed at supporting MSMEs by easing their access to finance, the people said on condition of anonymity.
When a loan repayment misses due date, the bank marks it as a special mention account (SMA-0). Once the delay crosses 30 days and 60 days, it is tagged SMA-1 and SMA-2. If the repayment is delayed beyond 90 days, it is classified as a non-performing asset. Once the loan is tagged as SMA, the borrower finds it virtually impossible to raise fresh loans.
The new framework may propose doubling the repayment period to 180 days before a loan is labelled NPA, the people said, expanding breathing room for small businesses. According to one of the two people cited above, the aim is to reduce the number of "avoidable closures" triggered by heavy debt burden.
In case of delay in loan repayment, the interest rate increases to the level of 'penal rate', which varies from case to case, compared to the initial interest rate agreed upon. The new framework is expected to relax the penalty rules as well.
Moreover, FRR 2.0 will establish a digital platform, where lenders can assess the given loan's viability, examine the borrower's repayment behaviour, and effectively reduce the time to restructure a loan, the two people said.
According to a second person, the new framework is expected to save about 1.2 million jobs. The development assumes significance given that India’s 7.4 million MSMEs contribute about 45% to its exports, about 30% of India’s total economic output and employ 330 million people.
To be sure, budget proposals undergo multiple stages of revision and refinement before final announcements are made.
Queries emailed to the union ministries of finance and MSME remained unanswered.
The earlier framework had asked lenders to establish special committees to plan loan restructuring for each business that had missed scheduled repayments.
The industry says the quest for capital remains an uphill task. An SME association official said that small businesses often fail to repay due to genuine financial issues. "But their intent is not against repaying debt, as they had been paying instalments earlier. There is a need to provide them more time to repay loans, and they should not be classified as SMA (special mention account). The new norms should look into this aspect," said Vinod Kumar, president of India SME Forum.
Lenders have begun using the SMA system for tracking delays. In August 2024, the Supreme Court also weighed in on the issue, asking banks to follow the SMA system until the loan was labelled as an NPA.
"As soon as a loan is categorized as SMA, fresh credit virtually turns out of reach for the small businesses, which require capital for expansion and their operations," said Vinod Kumar of India SME Forum.
The plan to cushion MSMEs' debt issues comes on top of other government initiatives in the same direction. On Monday, Mint reported that Centre is planning to exponentially increase the financial outlay of its MSME Champion Scheme to around ₹10,000 crore for the next five years.
Experts say MSMEs face financial challenges because many cannot secure collateral to obtain loans.
“For many MSMEs, access to finance is challenging due to a lack of collateral. A platform tracking repayments, if implemented, could potentially resolve the information asymmetry between the business and the lenders. Many businesses have lost access to credit lines due to genuine business failures. If information on the repayment of these loans is available, the process will become that much more transparent," said Veeramani C., professor and director at the Centre for Development Studies, Thiruvananthapuram-based think tank.
Gross NPAs at scheduled commercial banks declined from about 9.11% in March 2021 to 2.58% by March 2025, according to a July 2025 finance ministry statement. Gross NPAs in MSME loans declined from about ₹1.87 trillion (11% of advances) in March 2020 to around ₹1.25 trillion (about 4% of advances) by March 2024, the finance ministry said in March 2025.
India’s MSME sector is formalizing rapidly, with the number of registered MSMEs rising from about 58 million a year ago in January 2025/, to about 74 million currently, according to data from the MSME ministry’s Udyam portal. However, many have faced uncertainties and business disruption. In surveys for the first and second quarters of FY26, the Small Industries Development Bank of India (SIDBI) said MSME optimism has cooled due to global challenges and US tariff measures, reflecting the ongoing troubles of India’s massive small industries sector.
The MSME sector has historically faced challenges in gaining access to capital. "Issues related to sickness of MSMEs, Non-Performing Assets and exit policy have been raised from time to time in different quarters," said the government's memorandum announcing the 2015 framework for revival and rehabilitation for MSMEs.
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