Tailoring NPA classification to cash‑flow cycles recommended for MSMEs

The Reserve Bank of India faces criticism from the top economic adviser, who insists that NPA classification should be calibrated to the actual cash‑flow dynamics of micro, small and medium enterprises. He noted that businesses in textiles, construction or food processing experience different working‑capital turnover periods, which the present 90‑day rule fails to accommodate.

According to the adviser, the existing tiered delay system – SME‑0 (0‑30 days), SME‑1 (31‑60 days) and SME‑2 (61‑90 days) – does not capture the nuance of sector‑specific payment schedules. When delays cross the 90‑day mark, the loan automatically becomes a non‑performing asset, often penalising firms that are still viable.

A revised approach, he suggested, would involve flexible thresholds and periodic reviews that reflect the diversity of MSME cash‑flow patterns, thereby preventing premature NPA classification and supporting sustainable credit growth.