Union Budget's FRR 2.0 Framework to Offer Debt Relief for Struggling MSMEs
In a significant move aimed at bolstering India's micro, small, and medium enterprises (MSMEs), the upcoming Union Budget is expected to introduce a comprehensive debt relief framework. Known as FRR 2.0, this updated policy seeks to address the persistent financial challenges faced by small businesses by easing access to finance and restructuring mechanisms.
Extended Repayment Timelines and Penalty Waivers
According to sources familiar with the matter, the new framework may propose doubling the repayment period to 180 days before a loan is classified as a non-performing asset (NPA). Currently, loans are tagged as special mention accounts (SMA-0, SMA-1, SMA-2) after delays of 30, 60, and 90 days, respectively, severely limiting access to fresh credit for borrowers.
"The aim is to reduce the number of avoidable closures triggered by heavy debt burden," one official stated. Additionally, FRR 2.0 is expected to relax penalty rules, waiving the increased interest rates that typically apply when repayments are delayed.
Digital Platform for Streamlined Restructuring
A key component of FRR 2.0 will be the establishment of a digital platform designed to streamline the loan restructuring process. This platform will enable lenders to assess loan viability, examine borrower repayment behavior, and significantly reduce the time required for restructuring.
"A platform tracking repayments, if implemented, could potentially resolve the information asymmetry between businesses and lenders," noted Veeramani C., a professor at the Centre for Development Studies. This transparency is crucial for MSMEs that often struggle to secure collateral for loans.
Broader Economic Impact
The development holds immense significance given that India's 7.4 million MSMEs contribute approximately 45% to exports, 30% of the country's economic output, and employ around 330 million people. The new framework is anticipated to save about 1.2 million jobs, providing a much-needed cushion for the sector.
Vinod Kumar, President of the India SME Forum, emphasized the need for such measures: "Small businesses often fail to repay due to genuine financial issues, but their intent is not against repaying debt. There is a need to provide them more time, and they should not be hastily classified as SMA."
Context and Challenges
The FRR 2.0 update comes as the MSME sector formalizes rapidly, with registered entities rising from about 58 million in January 2025 to nearly 74 million currently. However, global challenges and US tariff measures have cooled optimism, as reflected in recent SIDBI surveys.
While gross NPAs in MSME loans have declined from ₹1.87 trillion in March 2020 to around ₹1.25 trillion by March 2024, access to capital remains a hurdle. The earlier FRR framework required lenders to set up special committees for restructuring, a process often seen as cumbersome.
It is important to note that budget proposals undergo multiple revisions before final announcements, and queries to the finance and MSME ministries have yet to receive official responses.
