Govt to revamp revival framework for MSMEs

The existing 2015-16 framework, which covers MSMEs with a debt of up to ₹25 crore, calls for lenders to come up with a plan to recover debt and streamline the operations of the enterprise.

Although restructuring loans for larger businesses is commonplace, that is not the same for small businesses. Smaller businesses which have less capital need more of a cushioning during financial distress. The revamp is being considered to boost entrepreneurship, said a person in the know of the development.

"The MSME ministry is working on the framework. It is yet to be finalized. This is aimed at helping MSMEs to get their loans restructured in case of financial distress. Distressed small businesses should be relieved through this framework," said one of the people cited above, adding that the new framework would also ease the procedure for lenders.

Over 58 million MSMEs contribute to about a third of the country's gross value added every year. From April 2023 to May 2024, MSMEs contributed to over 45% of Indian exports. MSMEs also employed over 216 million people as of 12 January, as per the government's Udyam portal.

Sectoral challenges

The sector, however, has consistently faced challenges in securing and repaying loans. "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.

There have been concerns over bank loans to small businesses.

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In the previous budget, finance minister Nirmala Sitharaman had said that a new mechanism would be launched for facilitating continuation of bank credit to MSMEs during their stress period.

"While being in the ‘special mention account’ (SMA) stage for reasons beyond their control, MSMEs need credit to continue their business and to avoid getting into the NPA stage. Credit availability will be supported through a guarantee from a government promoted fund," the finance minister said.

As per an MSME ministry press release in August 2024, the government had sanctioned a ₹20,000-crore Subordinate Debt for stressed MSMEs.

Subordinate debt for stressed MSMEs is the government's aid for enterprises in the sector which have been classified as NPAs, allowing them to continue running operations and reduce their debt burden.

In 2015, the government created an FRR for MSMEs, asking banks and other lenders to form a special committee and produce an action plan to restructure loans of each individual enterprise which had missed scheduled repayments.

The Reserve Bank of India in 2016 limited the usage of this framework for debts of up to ₹25 crore, while MSMEs with debts over ₹25 crore would be revived using the guidelines on Corporate Debt Restructuring (CDR) or Joint Lenders’ Forum (JLF) mechanism.

"Even after repeated directives from the government, RBI and also the intervention by Supreme Court, banks have not set up the mandated committees for loan restructuring, most banks are yet to take a step in this front. Restructuring of MSME loans should have been a norm as these entrepreneurs fight for their survival unlike the deep-pocketed large businesses," said Vinod Kumar, president, India SME Forum.

Approval from banks

The RBI also asked all banks to approve this policy in their respective boards by the end of June, 2016. Now, lenders would have to identify stress in MSME accounts using the special mention account (SMA) system before classifying these loans as MSMEs.

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Under the SMA system, MSMEs which have delayed repayment by up to 30 days would be classified as SMA-0, those with delays up to 60 days would be SMA-1, and enterprises with delays up to 90 days would be SMA-2. Additionally, if an MSME itself identified stress before delays in repayment, it could approach lenders and seek restructuring of loans after being classified as SMA-0.

The objective of this FRR was clear—to enable MSMEs to seek relief, as well as concessions for revival, in times of distress.

Issues in the 2015-16 FRR started cropping up when lenders started using the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, against stressed MSMEs, instead of the 2015 framework issued by the central government and amended by the RBI.

Industry bodies say as many as 1.2 million jobs can be saved by extending credit lines to MSMEs for 180 days instead of 90 days before qualifying them as NPAs, waiving existing penalties on MSMEs for delays in repayment, and allowing a better repayment plans to MSMEs. 

The Supreme Court weighed in on this issue, mandating lenders to classify stressed MSMEs into the subcategories under the special mention account (SMA) status before qualifying these loans as NPAs. The top court added that lenders could only take action against MSMEs under the SARFAESI Act after the loans have been converted to NPAs. Until then, banks were to follow the framework for revival and rehabilitation of MSMEs, as created by the union government and the RBI, the apex court said in its judgement dated 1 August, 2024.

Between the enactment of the 2015-16 FRR and the Supreme Court's relief to MSMEs in 2024, the union government changed the definition of MSMEs. Under the new definition, micro enterprises are those that have an investment of under ₹1 crore and a revenue of under ₹5 crore; small enterprises are those with an investment of under ₹10 crore and revenue of under ₹50 crore; and medium enterprises have and investment of under ₹50 crore and revenue of less than ₹250 crore.

Queries mailed to the union MSME ministry remained unanswered till press time.

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