Credit access, review of stressed asset norms top MSME body's wishlist

New Delhi: The country's top small business body has called on the government to improve credit access for micro, small and medium enterprises by lowering collateral requirements for certain MSMEs and scrapping third-party ratings for assessing loan repayment capacity.

The Federation of Indian Micro and Small & Medium Enterprises (Fisme), in its pre-budget representation to the finance ministry, has also proposed a revision in the special mention account (SMA) guidelines that categorise stressed MSMEs to encourage their revival.

It urged the government to relax stringent collateral requirements for asset-heavy or high-turnover MSMEs related to eligibility criteria, evaluation timeframe, and terms of extending a loan. "Reduced collateral requirements would free up valuable assets for MSMEs, allowing them to reinvest in growth and expansion," Fisme said, adding that this would also promote a culture of financial discipline among MSMEs, encouraging them to maintain strong financial performance.

The current SMA guidelines are an automatic process and rule out any scope for the revival of stressed MSMEs, it said. "The issue is that SMA framework's trigger is automatic, computer driven and lacks a mechanism to consider the qualitative reasons of delay," Fisme said in its representation.

"Once red-flagged, the account becomes a pariah and banks restrict, even withdraw, banking facilities, bringing banking operations of the unit to a grinding halt." It has suggested funds for supporting SMA MSMEs should be "based on the need and not rigidly pegged at 10%."

Credit, export
The federation also called for abandoning the Bank Loan Rating (BLR) ratings, also known as third-party ratings, used for assessing the loan repayment capacity of MSMEs. This assumes significance in the wake of the budget announcement of FY25 that public sector unit banks should formulate their credit assessment models.

Fisme also sought clarity on the credit assessment model announcement, saying the "lack of explicit RBI guidelines on the issue has allowed the practice to continue, more or less."

Cautioning against imposing duties on raw materials such as steel, copper and aluminium as it may harm the MSME sector, it said: "The protectionist approach will result in increased production costs, reduced innovation and efficiency and profitability and weakened global competitiveness for MSMEs."

Fisme urged the government to focus on financing MSME exports as they have around 50% share in merchandise shipments, which are facing tough challenges globally.