Lenders Flag Sudden Stress In MSME Loans, See Slower Growth Ahead

Indian lenders are sounding an alarm over rising stress in micro, small and medium enterprises segment, with a few reporting early signs of strain in their latest earnings.

While most lenders remain hopeful of an eventual recovery, many have indicated that stress in this segment has emerged "suddenly" and could hamper near-term credit growth.

India's largest non-banking finance company Bajaj Finance has flagged that the stress in the MSME book caught the lender off-guard.

"MSME business has shown some strains in February. It came in a little too suddenly," Managing Director Rajeev Jain told analysts in the post-earnings call.

"We are seeing a slowdown in 13 out of the 17 key industries we track. Three others are actually in contraction. So, in effect, it's a near-systemic slowdown," Jain said.

Bajaj Finance's consolidated MSME lending book grew 29% on year to Rs 52,538 crore, which forms 20% of its total loan book. In June, the total loan book stood at Rs 4.41 lakh crore.

"Credit cost was elevated in two & three-wheeler and MSME businesses. Company has taken significant credit actions in both these businesses and AUM growth for both these businesses will be low for FY26," the company said.

Jain also pointed out that the lender offered restructuring to standard MSME borrowers facing temporary cash flow issues.

Last month, NDTV Profit had reported that the MSME segment is showing cracks in credit health as signs of overleveraging have started emerging, particularly visible in low-ticket size loans dominated by NBFCs.

The stress in MSMEs comes amid a broader economic slowdown, tight credit environment and some also point to overleveraging of borrowers percolating in unsecured business loans.

State-owned lender Bank of India is also witnessing stress in recovering loans in the MSME segment, MD Rajneesh Karnatak had said at the post earnings conference.

Lenders believe that the stress is largely in the micro loans, which are low-ticket worth Rs 20 lakh and not so much in the mid- and large segment.

Even Shriram Finance said that it witnessed slowdown in its MSME loan book due to seasonality but has not sounded caution on the growth of its book and expects rural market demand to be strong.

Answering to a query, Executive Vice Chairman Umesh Revankar said that the NBFC focuses on small-ticket loans to traders and service sector businesses and that it has less exposure to manufacturing.

"We've not seen major fluctuations in their (MSME) earnings or cash flows," Revankar said, adding that the lender's customer typically doesn't have more than one or two loans.

While a major lender in the MSME segment, UGRO Capital is not witnessing stress but expects this could be because of overleveraging as new loans applications are getting rejected largely on account of tight policy parameters, CEO Anuj Pandey said.

"...I think MSME turnovers has not gone up that much while their number of loans have and our policy, which rejects new applications is showing that. So, we can say that it is largely because of overleveraging," he told NDTV Profit.

UGRO Capital will announce its June quarter results on August 11.

NBFC small business loans overdue for more than 90 days, within 12 months of origination, have risen to 1.9% as of March. This figure was at 1.3% a year ago, the latest MSME Pulse report showed.

Business loans under Rs 10 lakh had the highest 12-month vintage delinquency, with recent originations seeing delinquency rates exceed 16% at the end of FY24, up from 8.7% in FY23. Current data is not available.

Lenders believe that slowdown in the economy leading to slow movement of goods, payments, thin margins and rising costs has weighed on MSMEs' businesses. They remain cautious on textiles and sea food or exporter-related industries.

When asked the same to Bank of Baroda in the post earnings call, MD Debadatta Chand said that commercial vehicle, construction and mining equipment, supply chain finance, TReDs are the core MSME growth areas for the bank.

"We are focusing on clusters on MSME. So, with all this, I think growing at around 17%-18% is possible for the bank. And we are expecting rather to upsize that," he said.

This stress has come as US President Donald Trump on Wednesday evening announced a 25% tariff on India plus a penalty for purchasing energy and military equipment from Russia.

While lenders have not started pruning their exposure to the MSME or related sectors impacted by the tariffs, they remain vigilant.

The MSME lending market, which ballooned from Rs 2,500–3,000 crore pre-COVID to Rs 11,000 crore is now shrinking back to around Rs 9,500-10,000 crore, Bajaj Finance’s management said.

Loan to the MSMEs grew 8.9% on year in June as compared to 4.9% on year growth in the same period a year ago, the Reserve Bank of India’s recent sectoral deployment data showed.

While lenders have sounded caution, the outlook for the coming quarters remains promising, SIDBI's outlook on the MSME sector said.

During April-June, the composite MSME business confidence index rose to 63.75 from 60.82 in Jan-Mar.

The composite MSME business expectations index stands at 62.19 for the September quarter and it is expected at 67.88 for Q2 of the next year.

This has come as sentiments appear especially strong in the trading and services sectors, the report said.