US tariff impact: MSME NPA classification period likely to be doubled

The Union government is mulling extending non-performing asset (NPA) classification period on loans to the micro, small and medium enterprises (MSME) from the current 90 days to 180 days, a move which will provide breather to cash-strapped firms against the backdrop of steep US tariffs, a senior government official said requesting anonymity. 

“The proposal to extend the loan default period for MSMEs from 90 days to 180 days is likely to be taken up by the Cabinet soon,” the official said.

 

He said that this move could provide additional breathing space for cash-strapped MSMEs to regularise their loan repayments, potentially cushioning the sector from export disruptions and liquidity stress triggered by the tariff action. 

An email sent to the Union Finance Ministry, Reserve Bank of India, and MSME Ministry seeking their response on it remained unanswered till press time. 

 

Vinod Kumar, president, India SME Forum said over 1 million jobs can easily be saved by extending the NPA default period to 180 days for MSMEs and allowing a better repayment plan to MSMEs.

 

“This is often done for the agriculture sector where credit has repayment moratoriums ranging from 180 days even up to 360 days, and many MSMEs have cyclic and seasonal cash flows much like the agricultural sector,” added Kumar.

 

During the Covid-19 pandemic, the RBI had extended the NPA classification period from 90 days to 180 days for a limited period.

 

The official said that the time period for special mention accounts (SMA) for MSMEs is also likely to be relaxed. SMA refers to an account that shows signs of stress.

 

Banks also anticipate that disruptions in supply chains linked to US trade could temporarily hinder some smaller businesses’ ability to repay loans.

 

In its post-earnings press conference last week CS Setty, chairman of India’s largest lender State Bank of India, said the direct impact of tariffs on India’s banking sector is expected to be limited, but the delay in spending stemming from the uncertainty of how and when these levies will be imposed can be damaging.