News Stocks Government Develops New Framework to Ease MSME Debt Burden and Prevent Business ClosuresGovernment Develops New Framework to Ease MSME Debt Burden and Prevent Business Closures
The government is updating the decade-old MSME revival framework with FRR 2.0, proposing to double the NPA classification period from 90 to 180 days and establish a digital platform for loan restructuring. The initiative aims to save 1.2 million jobs and reduce avoidable business closures, supporting India's 7.4 million MSMEs that contribute 45% to exports and employ 330 million people. The framework addresses current challenges where businesses lose access to fresh credit once classified as SMA, providing much-needed breathing room for genuine financial difficulties.
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The union ministries of finance and MSME are developing a comprehensive update to the decade-old framework for revival and restructuring (FRR) for micro, small, and medium enterprises (MSMEs), according to two people aware of the plan. The new framework, called FRR 2.0, aims to support MSMEs by easing their access to finance and reducing avoidable business closures triggered by heavy debt burdens.
Extended Timeline for NPA Classification
Under the current system, when a loan repayment misses its due date, banks mark it as a special mention account (SMA-0). The classification progresses to SMA-1 after 30 days and SMA-2 after 60 days of delay. If repayment is delayed beyond 90 days, the loan is classified as a non-performing asset (NPA). Once tagged as SMA, borrowers find it virtually impossible to raise fresh loans.
| Current Classification System: | Timeline |
|---|---|
| SMA-0: | Immediate upon missing due date |
| SMA-1: | After 30 days delay |
| SMA-2: | After 60 days delay |
| NPA Classification: | After 90 days delay |
| Proposed NPA Classification: | After 180 days delay |
The new framework proposes doubling the repayment period to 180 days before a loan is labeled as NPA, significantly expanding breathing room for small businesses.
Digital Platform and Penalty Relief
FRR 2.0 will establish a digital platform where lenders can assess loan viability, examine borrower repayment behavior, and effectively reduce the time required to restructure loans. The framework is also expected to relax penalty rules, addressing the current system where interest rates increase to penal rates during repayment delays.
| Key Features of FRR 2.0: | Benefits |
|---|---|
| Digital Assessment Platform: | Faster loan restructuring decisions |
| Extended NPA Timeline: | 180 days vs current 90 days |
| Relaxed Penalty Rules: | Reduced financial burden |
| Expected Job Savings: | 1.2 million jobs |
Economic Impact and Industry Significance
According to one of the sources, the new framework is expected to save about 1.2 million jobs. This development assumes particular significance given that India's 7.4 million MSMEs contribute about 45% to the country's exports, about 30% of India's total economic output, and employ 330 million people.
Industry Perspectives and Challenges
Vinod Kumar, president of India SME Forum, emphasized that small businesses often fail to repay due to genuine financial issues rather than intent to default. "There is a need to provide them more time to repay loans, and they should not be classified as SMA. The new norms should look into this aspect," Kumar stated.
Experts highlight that MSMEs face financial challenges primarily due to collateral requirements. Veeramani C., professor and director at the Centre for Development Studies, noted that a platform tracking repayments could resolve information asymmetry between businesses and lenders, making the process more transparent.
Broader Government Initiatives
The debt relief framework complements other government initiatives supporting MSMEs. The Centre is planning to increase the financial outlay of its MSME Champion Scheme to around ₹ 10,000 crore for the next five years. Additionally, gross NPAs in MSME loans have declined from about ₹ 1.87 trillion (11% of advances) in March 2020 to around ₹ 1.25 trillion (about 4% of advances) by March 2024.
Sector Formalization and Current Challenges
India's MSME sector is formalizing rapidly, with registered MSMEs rising from about 58 million a year ago to about 74 million currently, according to data from the MSME ministry's Udyam portal. However, surveys by the Small Industries Development Bank of India (SIDBI) indicate that MSME optimism has cooled due to global challenges and US tariff measures, reflecting ongoing troubles in India's small industries sector.
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