In short. Banks must follow the Framework for Revival and Rehabilitation of MSMEs before classifying an eligible MSME loan as NPA. The account goes to a Committee for Stressed MSMEs, which decides rectification, restructuring or recovery. The Supreme Court held this mandatory in 2024, but the borrower must assert MSME status with documents before NPA, not after recovery begins.
Most MSME owners hear about this framework only after the bank has already sent a section 13(2) notice. By then the protection is harder to use. The framework is built around early stress, when an account is overdue by weeks rather than months, and it rewards the borrower who speaks up early and in writing. This post explains how the framework works, how to make the bank apply it, what restructuring usually looks like, and where the protection ends.
If you have already received a demand notice, read this alongside our post on replying to a SARFAESI section 13(2) notice. If the business is beyond rescue and you are thinking of a structured exit, see pre-packaged insolvency for MSMEs and our insolvency advice page.
- Framework
- MSME Ministry notification of 29 May 2015, with RBI directions to banks
- Who qualifies
- Udyam-registered MSMEs with bank exposure up to ₹25 crore
- Key ruling
- Pro Knits v Canara Bank, Supreme Court, 1 August 2024
- Mandatory referral
- SMA-2: overdue 61 to 90 days
- Decision options
- Rectification, restructuring or recovery
- When to claim MSME status
- Before the account is classified NPA
Can a bank declare an MSME loan NPA without trying restructuring first?
Not if the borrower is an eligible MSME that has made its status known. In Pro Knits v Board of Directors of Canara Bank, decided on 1 August 2024, the Supreme Court held that the Framework for Revival and Rehabilitation of MSMEs, notified by the Ministry of MSME on 29 May 2015 under the MSMED Act, and RBI's directions implementing it, are binding on banks. The banks must follow the framework's process before classifying the account as a non-performing asset. A classification made without it cannot be the basis for SARFAESI action.
The same judgment drew a firm line on the other side. The borrower has to produce authenticated and verifiable documents showing it is an MSME, and it has to do so before the account is classified as NPA. A borrower that stays silent while the bank moves through the NPA stage and the SARFAESI process, and then raises the MSME plea to stall a sale, will not be allowed to misuse the framework.
So the protection is real, but it is front-loaded. It belongs to the business owner who writes to the bank early, attaches the Udyam certificate and asks for the account to be placed before the committee. It does very little for the owner who remembers it only when the bank's authorised officer arrives to take possession.
Who counts as an MSME for this purpose?
An enterprise is an MSME if it is classified as micro, small or medium under the MSMED Act, based on investment in plant and machinery or equipment and annual turnover. The limits were revised with effect from 1 April 2025: micro enterprises up to ₹2.5 crore investment and ₹10 crore turnover, small up to ₹25 crore and ₹100 crore, and medium up to ₹125 crore and ₹500 crore. Both limits must be met. Registration is on the Udyam portal, and the Udyam certificate is the document banks look for.
The framework applies where the enterprise's total exposure to banks, including consortium and multiple banking arrangements, is up to ₹25 crore. Larger accounts are handled under RBI's general framework for resolution of stressed assets, which also provides for a resolution plan but without the MSME-specific committee process.
Two practical points. First, register on Udyam now if you have not, and keep the certificate updated with the correct activity and figures; a registration made in a hurry after default invites the argument that it was done only to stall recovery. Second, the framework is addressed to banks. If your lender is an NBFC, check its board-approved policy on MSME stress, because many NBFCs follow similar processes, but the Pro Knits ruling was about a bank.
SMA stages: how the bank measures stress
Banks track early stress in loans through special mention account (SMA) categories. These are the trigger points for the framework.
| Category | What it means | What should happen |
|---|---|---|
| SMA-0 | Not overdue beyond 30 days, but signs of incipient stress | Bank monitors; borrower can apply to the committee voluntarily |
| SMA-1 | Principal or interest overdue 31 to 60 days | Bank may refer to the committee; borrower should apply in writing |
| SMA-2 | Principal or interest overdue 61 to 90 days | Referral to the Committee for Stressed MSMEs is mandatory |
| NPA | Overdue more than 90 days | Framework should already have been applied; SARFAESI and DRT options open |
For cash credit and overdraft accounts, 'overdue' is measured differently: the account becomes irregular when the outstanding exceeds the drawing power or sanctioned limit continuously, or when interest is not serviced. Check how your bank measures it from your sanction letter and the account statements.
What the Committee for Stressed MSMEs does
Each bank must constitute committees to examine stressed MSME accounts. A typical committee includes a senior business executive as chair, a risk or credit officer, and an independent external member with MSME experience. For consortium or multiple banking accounts, the lead bank or the bank with the largest exposure refers the case and the lenders agree to act together.
The committee's job is to look at the business, not just the overdue figures. It asks why the account is stressed, whether the business is viable, and what will fix it. It can take a view on its own or on the basis of a techno-economic viability study for larger exposures. It then decides a corrective action plan: rectification, restructuring or recovery.
Bank policies under the framework fix timelines for each step. A common pattern is notice to the borrower within five working days of a reference, the borrower's reply with details of all liabilities within fifteen working days, and a decision within thirty days of the committee's first meeting, with longer periods where a viability study is needed. Ask your bank for its framework policy; most banks publish a version on their website, and it tells you exactly which officer to write to and what timeline to hold them to.
How to apply for MSME restructuring under the framework
The process works best when the borrower starts it, rather than waiting for the bank.
Check your status and exposure
Confirm your Udyam registration and classification, and add up your total exposure to all banks. If you are under ₹25 crore, the framework applies.
Write to the bank early
As soon as you see stress, send a signed letter to the branch and the regional or credit office, saying you are an MSME, attaching the Udyam certificate, and asking for the account to be placed before the Committee for Stressed MSMEs. You can apply voluntarily even before default, for example if losses have eroded net worth.
Explain the cause of stress
Set out why cash flow has dropped: delayed payments from buyers, loss of a contract, input cost rise, a dispute or a one-off event. Be specific and attach evidence such as outstanding receivables and correspondence.
Disclose all liabilities
List every loan, creditor and statutory due, including GST, EPF and tax arrears. Banks expect full disclosure; a hidden liability discovered later can sink the plan.
Propose a realistic plan
Suggest what will work: a revised repayment schedule, conversion of the irregular part of working capital into a term loan, a short moratorium, fresh limited funding, or promoter contribution. Back it with cash flow projections.
Track the timeline in writing
Keep copies and acknowledgements. If the bank does not respond within its policy timelines, write again and record that the account is pending before the committee.
Sign the documents carefully
If restructuring is approved, read the sanction letter, the revised terms and any additional security or personal guarantee before signing. Ask about the asset classification consequence and the conditions for upgrade.
If the bank ignores your letters and moves to classify the account as NPA, write once more, pointing to the framework and the Pro Knits ruling. That letter is the foundation of any later challenge.
Rectification, restructuring or recovery: what each one means
Rectification means the borrower regularises the account itself, within an agreed time, without any loss to the bank. It suits short-term stress: a buyer has delayed a large payment that is clearly coming, or a seasonal business is between seasons. The bank may give limited additional working capital, often as an ad hoc facility for a few months. Rectification usually has to be implemented quickly, typically within thirty days of the decision.
Restructuring changes the loan terms because the original terms no longer fit the business's cash flow. Common features are a longer repayment period, a moratorium on principal, conversion of irregular working capital into a working capital term loan, a funded interest term loan for unpaid interest, and sometimes a reduction in interest rate. Banks usually require that the borrower is not a wilful defaulter, that the business is viable, and that promoters bring in some money and give personal guarantees. Restructuring has to be implemented within a longer period, often ninety days.
Recovery is the bank's decision that neither rectification nor restructuring will work, or that the borrower has failed to perform an agreed plan. Recovery can include a one-time settlement, SARFAESI action, a DRT original application, or insolvency proceedings. The key point is that recovery is supposed to be a decision taken after the framework's process, not a default setting. If the bank went straight to recovery without the committee considering the case, that is the ground of challenge.
Does applying for restructuring stop SARFAESI action?
Not automatically. There is no statutory moratorium for MSMEs under the framework, and filing an application with the bank does not freeze recovery. What the framework does is stop the bank from treating the account as NPA without going through the committee process first, and an invalid NPA classification undermines every SARFAESI step that rests on it. Restructuring agreements can also contain a stand-still clause, under which lenders agree not to take recovery steps while the plan is being implemented.
In practice, the protection works like this. You apply to the committee while the account is in SMA. The bank must consider the application before classifying the account as NPA. If the bank classifies the account as NPA and issues a section 13(2) notice anyway, you raise the framework in your objection under section 13(3A), and the bank must reply within fifteen days. If the bank takes possession, the framework becomes a ground in your section 17 application before the DRT. Pro Knits itself reached the Supreme Court through a writ petition, and a writ before the High Court is another route where the bank has acted in clear breach of binding directions.
What the framework does not do is protect a borrower who has had the committee process and failed to perform the agreed plan, or one whose business has no realistic prospect of revival. It is a structured chance at revival, not a permanent shield.
A made-up example: the packaging unit in Ghaziabad
Here's a made-up example. Meera runs a corrugated packaging unit in an industrial area in Ghaziabad, registered on Udyam as a small enterprise. Her bank has given ₹3.2 crore in working capital and a ₹1.4 crore term loan for machinery. In 2026, two large buyers delay payments of about ₹90 lakh between them, and her cash credit account stays above drawing power for over two months. The bank classifies it as SMA-2.
Meera writes to the branch and the regional office with her Udyam certificate, a statement of receivables, the buyers' purchase orders and a cash flow projection. She asks for the account to go to the Committee for Stressed MSMEs and proposes converting ₹60 lakh of the irregular working capital into a three-year working capital term loan. She also files claims against the buyers before the MSME Facilitation Council for the delayed payments.
The committee meets, calls for a short viability note and approves restructuring on terms close to her proposal, with a promoter contribution of ₹15 lakh and her personal guarantee. The account is restructured, not classified as NPA through default. Had she waited for the 90-day mark and the section 13(2) notice, she would have been arguing about the framework in the DRT rather than using it at the bank.
How and when to tell the bank you are an MSME
The best time is when you first borrow, and the second best is the moment stress appears. Banks often hold the Udyam certificate on the loan file already, because MSME loans count towards priority sector lending. Do not assume that is enough. Under Pro Knits, the borrower must produce the documents to claim the benefit of the framework, and the safest way is a fresh letter, specifically asking for the framework to be applied, at the SMA stage.
The letter should say four things: the enterprise is registered as a micro, small or medium enterprise, with the Udyam number; the total bank exposure is within ₹25 crore; the account is under stress for stated reasons; and you request reference to the Committee for Stressed MSMEs and propose a corrective action plan. Attach the certificate, the latest financial statements and a short note of liabilities. Send it by email and by post or hand delivery with acknowledgement.
When Advocate B.K. Singh looks at an MSME file after a SARFAESI notice, the first thing he checks is the date of the first written claim to MSME status and the date of NPA classification. If the letter came first, the framework is a live argument. If it came only after the NPA date, the argument is much weaker and the strategy usually shifts to the notice itself, the valuation, a settlement or the other defences available in the DRT.
Documents to prepare for an MSME restructuring request
A committee decides on paper. These are the papers that make the case.
Status and eligibility
- Udyam registration certificate
- Statement of total exposure to all banks
- Sanction letters for each facility
- Consortium or multiple banking details, if any
Financial position
- Audited financial statements for the last two or three years
- Provisional figures for the current year
- Stock and receivables statements
- GST returns and bank statements for the last twelve months
Cause of stress
- Ageing list of receivables with buyer names
- Correspondence with delaying buyers
- Evidence of a lost contract or cost increase
- MSME Facilitation Council claim, if filed
The plan
- Cash flow projections for the restructured period
- Proposed repayment schedule
- Promoter contribution and its source
- List of all other liabilities, including statutory dues
What if the business borrows from more than one bank?
Then the banks have to act together, and that changes the tactics. Under the framework, where an MSME has a consortium or multiple banking arrangement, the lead bank or the bank with the largest exposure refers the case to its committee, and the other lenders are expected to agree on a common plan. A restructuring that one bank approves and another rejects rarely works, because the rejecting bank can still classify its account as NPA and start recovery, and cross-default clauses in the other banks' sanction letters may follow.
So write to every lender, not just the one where the stress first shows. Send each of them the same letter, the same Udyam certificate and the same statement of liabilities, and ask the lead bank in writing to convene the lenders. Disclose to each bank what you owe the others; lenders compare notes through credit reports and central repositories in any case, and a borrower caught giving different figures to different banks loses credibility at once.
Unsecured lenders and NBFCs outside the bank group are a separate problem. They are not bound by the committee's decision, and an aggressive NBFC can push the account into trouble while the banks are still considering a plan. Where that is a risk, it is usually better to negotiate a parallel standstill or settlement with the NBFC early, so that one creditor's action does not unravel a plan the banks are willing to approve.
What restructuring does to your credit record and asset classification
Restructuring is not free of consequences. Under RBI's prudential rules, a restructured account is generally downgraded or kept as non-performing in the bank's books, and can be upgraded only after it performs satisfactorily for a specified period after the restructuring. The account is also flagged as restructured in credit information reports. That can affect fresh borrowing for a while.
Even so, a restructured account is usually much better than an NPA under recovery. An NPA under SARFAESI can end with the loss of the factory or the promoter's house, a wilful defaulter inquiry if the bank sees grounds, and personal guarantee claims against the promoters. A restructured account, if it performs, returns to normal.
Read the restructuring sanction letter for the upgrade conditions, the covenants and any events of default. Covenants such as maintaining a minimum current ratio, routing all sales through the bank, or not taking other loans without consent are common. Breaching a covenant can bring back the entire loan as due, so negotiate the ones you know you cannot meet before you sign rather than after.
Mistakes MSME owners make when the loan gets into trouble
These mistakes come up repeatedly and most of them cannot be fixed later.
- Waiting for the NPA date. The framework protects the account before NPA. A borrower who waits until the 13(2) notice has lost most of its value.
- Relying on phone calls with the branch manager. Informal assurances leave no record. Every request should be a signed letter with acknowledgement.
- Registering on Udyam only after default. A late registration invites the argument that it is a stalling tactic. Register as soon as the business qualifies.
- Hiding other liabilities. Tax arrears or private loans discovered later can lead the committee to reject the plan or the bank to call off a restructuring.
- Proposing a plan the business cannot keep. A failed restructuring leads straight to recovery, often with less sympathy. Propose terms that the projected cash flow actually supports.
- Ignoring the guarantees. Promoters are almost always guarantors. If the plan fails, the bank can proceed against guarantors too, so understand that exposure before signing. Our post on a guarantor's liability explains it.
- Diverting funds while the account is stressed. Moving money to related parties during stress can trigger fraud or wilful default proceedings, which are far more serious than an NPA.
Other protections MSMEs can use alongside restructuring
The most useful is often the recovery of your own dues. Under the MSMED Act, buyers must pay registered micro and small suppliers within the agreed period, not exceeding 45 days, and delayed payments carry compound interest at three times the RBI bank rate. A claim before the MSME Facilitation Council can bring in money and also shows the bank that the stress has an identifiable cause. Our post on MSME delayed payment claims explains the process.
Where restructuring at the bank is not possible, the Insolvency and Bankruptcy Code offers pre-packaged insolvency for corporate MSMEs, under which the promoters can propose a base resolution plan with the support of creditors while largely keeping control during the process. Section 240A of the Code also relaxes some of the section 29A ineligibility rules for MSMEs, so a promoter may be able to bid for their own company in a resolution process where others could not.
A one-time settlement is the other route, particularly where the business has assets that can be sold or the promoter can raise money from family or a new investor. Settlements for MSME accounts are often negotiated under the bank's OTS policy or a scheme, and the committee process can feed into it. See our post on negotiating a one-time settlement.
When the bank has already started SARFAESI action
If you receive a section 13(2) notice, you have sixty days and the right to object under section 13(3A). Use the objection to raise the framework if you claimed MSME status before NPA, and attach the earlier letters. If you never claimed it, say so honestly to your advocate, because the strategy will rest on other points: whether the notice is valid, whether the amount is correctly stated, whether the property is exempt agricultural land, and whether a settlement is realistic.
If the bank takes possession under section 13(4), or obtains an order from the District Magistrate or Chief Judicial Magistrate (earlier called the Chief Metropolitan Magistrate) under section 14, the remedy is an application to the DRT under section 17 within forty-five days. The MSME framework can be one ground in that application. The DRT can grant interim relief, but it usually expects the borrower to show good faith, often through a deposit. If an auction is announced, read our post on stopping a bank auction.
If you would like an advocate to look at your bank correspondence and tell you whether the framework is still a live argument, the team of Advocate B.K. Singh at B.K. Singh & Associates can review the papers. You can send them through our online enquiry, and read about our DRT and SARFAESI work in Delhi and the broader banking law practice.
What to do this week if your MSME loan is under stress
- Download or locate your Udyam certificate and check the classification is correct.
- Add up your total exposure to all banks and confirm it is within ₹25 crore.
- Ask the branch in writing for the SMA status of each account.
- Send a signed letter asking for reference to the Committee for Stressed MSMEs, with the Udyam certificate attached.
- Prepare a one-page note on the cause of stress and a realistic repayment proposal.
- List every liability, including GST, EPF, tax and private loans.
- Start recovery of your own overdue receivables, including a Facilitation Council claim if buyers owe you.
- Keep every acknowledgement and email in one file, with dates.
Frequently asked questions
Can a bank declare my MSME loan NPA without restructuring?
If you are an eligible MSME and you claimed that status with documents before the NPA date, the bank must first follow the revival framework, including reference to the Committee for Stressed MSMEs. The Supreme Court held this mandatory in Pro Knits v Canara Bank in 2024. An NPA classification made without it can be challenged.
What is the Committee for Stressed MSMEs?
It is a committee each bank must set up to examine stressed MSME accounts with exposure up to ₹25 crore. It looks at the cause of stress and the viability of the business, and decides a corrective action plan: rectification, restructuring or recovery.
What is the limit for the MSME revival framework?
The framework applies to MSMEs whose total exposure to banks, including consortium and multiple banking arrangements, is up to ₹25 crore. Larger accounts are dealt with under RBI's general framework for resolution of stressed assets.
What did the Supreme Court decide in Pro Knits v Canara Bank?
The Court held on 1 August 2024 that the 2015 MSME revival framework and RBI's directions are binding on banks, and that banks must follow them before classifying an MSME account as NPA. It also held that the borrower must produce proof of MSME status before NPA and cannot raise the plea belatedly to stall recovery.
Does an MSME restructuring application stop SARFAESI?
Not automatically. There is no statutory moratorium. But if the bank classifies the account NPA without following the framework, that classification and the SARFAESI steps based on it can be challenged, and restructuring agreements often contain a stand-still clause.
Can I apply for MSME restructuring before I default?
Yes. A borrower can approach the bank voluntarily if it reasonably expects stress, for example because losses have eroded a large part of its net worth or a major buyer has stopped paying. Applying early is usually far more effective than waiting for default.
Do I need Udyam registration to use the MSME framework?
Yes, in practice. The Udyam certificate is the proof banks and courts look for. Register as soon as the business qualifies, because a registration made after default can be attacked as a stalling tactic.
Will restructuring affect my CIBIL score?
A restructured account is flagged as restructured in credit reports and may be treated as non-performing in the bank's books until it performs for a set period. That can affect fresh borrowing for a time, but it is usually far less damaging than an NPA under recovery.
Does the MSME framework apply to NBFC loans?
The 2015 framework and the Pro Knits ruling concern banks. Many NBFCs have board-approved policies for MSME stress along similar lines, so ask your NBFC for its policy in writing and check what it commits to.
What if the bank ignores my MSME restructuring request?
Write again, citing the framework and the Pro Knits ruling, and keep the acknowledgement. If the bank then classifies the account NPA and issues a section 13(2) notice, raise the point in your objection under section 13(3A), and if possession is taken, in a section 17 application before the DRT.
Can the bank proceed against promoter guarantors during MSME restructuring?
Restructuring usually involves fresh or continued personal guarantees. If the plan is implemented, guarantors are generally not pursued while the account performs, but if the plan fails, the bank can proceed against the borrower and the guarantors together.
What are the MSME classification limits from 2025?
With effect from 1 April 2025, micro enterprises are those with investment up to ₹2.5 crore and turnover up to ₹10 crore, small up to ₹25 crore and ₹100 crore, and medium up to ₹125 crore and ₹500 crore. Both conditions must be met.
Written and reviewed at B.K. Singh & Associates
Advocate B.K. Singh
Founder of B.K. Singh & Associates. MCA, LL.B., LL.M., with more than twenty years of practice before the Supreme Court, the Delhi High Court, district courts and tribunals across Delhi NCR. This article explains the general law as of 24 October 2026; it is not legal advice on your facts.