Mistakes, Problems and Official Sources
MSME loan overdue: SMA, NPA, restructuring and SARFAESI explained
What happens when an Indian MSME misses EMIs or over-draws a cash credit limit, from SMA-0 to NPA, how the RBI MSME revival framework and restructuring work, and your rights on recovery.
When an MSME loan repayment is overdue, the lender classifies the account as SMA-0 (1–30 days overdue), SMA-1 (31–60 days) and SMA-2 (61–90 days); beyond 90 days it becomes a non-performing asset (NPA). For cash credit and overdraft limits, the same clock runs when the account is "out of order", for example over-drawn beyond the limit or drawing power, or when credits do not cover the interest. Early stress is the time to act: RBI's framework for revival and rehabilitation of MSMEs requires lenders to have a process for identifying stress and agreeing a corrective plan, and an MSME can itself ask for this. Once an account is an NPA, a secured lender can use the SARFAESI Act to take possession of the security after a 60-day demand notice.
This guide belongs to the MSME loan mistakes and rejections overview. It is general information, not legal advice. If you have received a notice, consult an advocate.
The classification timeline
| Days overdue (term loan) | Status | What it means for you |
|---|---|---|
| 1–30 | SMA-0 | Reported to credit bureaus as overdue; penal charges may apply |
| 31–60 | SMA-1 | Stress is visible to all lenders through central reporting |
| 61–90 | SMA-2 | Lender must look at corrective action; the account is close to NPA |
| Over 90 | NPA (sub-standard) | Interest not recognised as income by the lender; recovery processes begin; credit report shows NPA |
Since RBI's November 2021 clarification, SMA and NPA status is determined as part of the day-end process on the due date, and an NPA account is upgraded to standard only when all arrears of interest and principal are paid, not just one EMI.
Cash credit and overdraft accounts are "out of order" if the outstanding balance stays continuously above the sanctioned limit or drawing power for 90 days, or if there are no credits for 90 days, or credits are not enough to cover the interest debited. See cash credit interest and drawing power.
Worked example: how an account slides into NPA
An illustrative unit has a term loan EMI of ₹54,356 due on the 5th of each month.
- 5 March EMI unpaid at day-end → SMA-0 on 5 March.
- 5 April: March EMI still unpaid (31 days) → SMA-1. A second EMI is now also due.
- 5 May: oldest overdue 61 days → SMA-2.
- 4 June: oldest overdue crosses 90 days → NPA.
Paying one EMI in May does not help much if the March EMI stays unpaid, because the classification follows the oldest unpaid amount. Paying the oldest overdue first matters.
Options before the account becomes an NPA
- Talk to the branch or relationship manager in SMA-0. Explain the cause (a delayed customer payment, a seasonal dip) with evidence.
- Ask for a corrective action plan. Under RBI's MSME revival framework (for MSMEs with aggregate loan limits up to ₹25 crore), lenders have committees to decide on options: rectification (you bring in funds to regularise), restructuring (changed repayment schedule, moratorium, conversion of overdue interest), or recovery if the business is not viable. Many banks let the MSME apply directly when it sees stress coming.
- Rephase working capital. Ask for a temporary ad hoc limit, a working capital term loan for the hard-core portion, or a review of drawing power margins.
- Use receivables. Discount invoices on large buyers through TReDS or pursue delayed payment interest from buyers under the MSMED Act.
- Refinance costly loans. A takeover of a high-rate loan by a cheaper lender can reduce EMIs, but only before the account is marked stressed.
If the account becomes an NPA
SARFAESI Act, 2002 (secured loans from banks and eligible NBFCs):
- The lender issues a demand notice under section 13(2) giving you 60 days to pay.
- You may make a representation or objection; the lender must reply within 15 days, giving reasons if it does not accept it.
- After 60 days, the lender can take possession of the secured assets, take over management in some cases, and sell the asset after valuation and a sale notice.
- You can apply to the Debts Recovery Tribunal under section 17 within 45 days of the measure you challenge.
- You can redeem the asset by paying the full dues with costs before the sale notice is published, as provided in the Act.
SARFAESI does not apply to certain small dues (for example, where the amount due is less than 20% of principal and interest, or below ₹1 lakh). Unsecured loans are recovered through civil suits, DRT applications for larger amounts, or arbitration where the agreement provides for it.
Recovery conduct. Lenders and their recovery agents must follow RBI's fair practices and recovery agent guidelines: no intimidation or harassment, calls only between 8 a.m. and 7 p.m., and agents must carry authorisation. Report violations to the lender and then the RBI Ombudsman; see the complaints guide.
Insolvency route. For companies and LLPs, the Insolvency and Bankruptcy Code also includes a pre-packaged insolvency process for MSMEs; it is a specialised route for which professional advice is essential.
Settlement vs restructuring
| Option | What happens | Effect on credit record |
|---|---|---|
| Regularise (pay all overdues) | Account returns to standard once all arrears paid | Overdue history remains but account is standard |
| Restructuring | New repayment terms agreed | Shown as restructured; less damaging than NPA |
| One-time settlement (compromise) | Lender accepts less than full dues | Shown as settled; many lenders treat it as serious negative information |
| Recovery / sale of security | Lender recovers from assets and guarantees | NPA and write-off history |
Frequently asked questions
Will a single late EMI make my account an NPA?
No. NPA status needs more than 90 days overdue on the oldest amount. But even one day overdue is SMA-0 and is reported, so pay as soon as possible.
Can the bank take my house if I gave it as collateral?
Under SARFAESI, a secured lender can take possession of mortgaged property after the notice process if the account is an NPA. That is why the secured vs unsecured guide recommends checking if collateral was needed at all.
Does CGTMSE pay my loan if I default?
No. The guarantee compensates the lender; the debt remains yours and recovery continues. See CGTMSE.
My lender reported me as NPA wrongly. What do I do?
Ask the lender for the account statement and the date of classification, dispute it in writing, and raise the credit report error with the credit information company. See credit reports.
Sources
- Reserve Bank of India — IRAC norms, MSME revival and rehabilitation framework, recovery agent guidelines
- Department of Financial Services — SARFAESI and Debts Recovery Tribunals
- Insolvency and Bankruptcy Board of India — pre-packaged insolvency for MSMEs
- India Code — text of the SARFAESI Act, 2002
