MSME Sector Sees Continued Growth as NPAs Decline Over the Past 5 Years

The Micro, Small, and Medium Enterprises (MSME) sector in India has witnessed significant growth in credit availability while experiencing a sharp decline in Non-Performing Assets (NPAs) over the last five years. According to data from the Reserve Bank of India (RBI), total MSME advances have steadily increased, while the gross NPA ratio has dropped from 11% in 2020 to 4% in 2024. Several measures have been undertaken by the government and RBI to ensure financial stability, strengthen loan recovery mechanisms, and improve the overall health of the MSME credit sector.

Key Highlights: MSME Credit Growth & NPA Decline

1. Growth in MSME Advances and NPA Reduction

• The total advances outstanding for MSMEs have grown significantly from ₹16.97 lakh crore (March 2020) to ₹28.04 lakh crore (March 2024).
• Gross NPAs in the MSME sector declined from ₹1.87 lakh crore (2020) to ₹1.25 lakh crore (2024).
• The gross NPA ratio has dropped from 11% in 2020 to 4% in 2024, reflecting improved financial stability.

2. Government & RBI Measures to Reduce NPAs in MSME Sector

Regulatory Framework

• A comprehensive framework for compromise settlements and technical write-offs was issued, covering all regulated entities.
• RBI permitted Asset Reconstruction Companies (ARCs) to acquire loans with detected frauds, enhancing the resolution of stressed assets.

Framework for Stressed MSME Accounts

• The ‘Framework for Revival and Rehabilitation of MSMEs’ (2015) was introduced to address financial stress.
• Banks were advised to formulate Loan Policy and Loan Recovery Policy, establish Recovery Cells, and strengthen information sharing.

Strengthening Financial Stability

• RBI implemented a risk-based supervisory approach to identify vulnerable sectors and borrowers.
• The Prudential Framework for Resolution of Stressed Assets (2019) encouraged early recognition and resolution of stressed accounts.

Pre-Packaged Insolvency Resolution Process (PPIRP)

• Aimed at providing a quick, cost-effective, and value-maximizing resolution for stressed MSMEs under the Insolvency and Bankruptcy Code (IBC).

COVID-19 Support Measures

• Loan moratoriums, recalculation of Drawing Power (DP), and Resolution Frameworks 1.0 & 2.0 were introduced to support MSMEs during the pandemic.

Union Budget 2024-25 Initiative

• A new mechanism has been announced to facilitate bank credit for MSMEs during their financial stress period.