Banks are increasingly cautious about lending to micro, small, and medium enterprises (MSMEs) due to stringent non-performing asset (NPA) classification rules. This hesitancy arises from concerns about the potential risk of loans turning into NPAs, impacting banks' financial health.

The Reserve Bank of India's (RBI) regulations on NPA classifications require banks to recognize stressed assets promptly. This has led to a conservative approach towards lending to MSMEs, which often face cash flow challenges and delayed payments from larger clients. Consequently, banks are wary of extending credit to these businesses, fearing that defaults might negatively affect their balance sheets.

Despite the crucial role MSMEs play in the economy, providing employment to millions and contributing significantly to GDP, they often struggle to secure financing. The current cautious stance of banks could hamper the growth and recovery prospects of these enterprises, especially post-pandemic.

Industry experts emphasise the need for a balanced approach, suggesting that banks should not shy away from lending to MSMEs but instead focus on innovative solutions to mitigate risks. Recommendations include customised financial products, better assessment of creditworthiness, and leveraging technology for improved credit monitoring.

To address the challenges faced by MSMEs, policymakers are urged to review and adjust the NPA classification framework, creating a more supportive environment for lending. Ensuring access to finance for MSMEs is essential for sustaining economic growth and fostering entrepreneurship across the country.