Rising Delinquencies In MSME Loans Spark Concerns For NBFCs

India's micro, small, and medium enterprises sector is showing cracks in credit health as signs of overleveraging have started emerging. This is particularly visible in low-ticket size loans dominated by non-bank financial companies, five people told NDTV Profit.

Recent data from the May and June editions of the MSME Pulse report by TransUnion CIBIL and SIDBI has painted a worrying picture of early delinquencies in MSME loans.

While overall commercial credit portfolio performance remained stable, trouble is brewing in the bottom tier, with borrowers of aggregate credit exposure up to Rs 10 lakh.

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.

This uptick in defaults is largely being attributed to overleveraging by MSME borrowers, where ambitious expansion plans did not match actual revenue growth.

Non-bank lenders believe that the turnover of MSME borrowers has not increased, but their debt has, which has caused overleveraging.

Sectors such as textiles have been under such stress where generally, turnovers have not gone up due to external headwinds, they said.

"From the data we monitor, there is surely higher delinquency, especially in the sub-Rs 5 lakh loan segment. Overleveraging is one of the reasons," Anil Pinapala, chief executive officer at Vivifi India Finance, said. The NBFC is one of the new entrants in this segment.

Shift in lending patterns of NBFCs is another reason. Those lenders seeking growth, have pushed deeper into lower-ticket, higher-risk segments, sometimes with less stringent underwriting.

NBFCs, which have expanded their market share significantly in MSME lending over the past five years from 21% to 33% in loans under Rs 1 crore, are now facing consequences of rapid growth.

MSME lending portfolio of non-bank lenders stands at approximately Rs 4.4  lakh crore as of FY25, with expectations to touch Rs 5.3 lakh crore by FY26, according to a report by CareEdge Ratings in May.

UGRO Capital has seen its gross non-performing assets ratio rise to 2.3% in the March quarter, up from 2.1% in the December quarter. Within product wise gross NPA, business loans showed a ratio of 4% in the March quarter from 3.8% a quarter ago. Bad loans in the secured business loans rose to 0.6% from 0.4% in the same period.

While borrowers with credit exposure up to Rs 1 crore make up 92% of all credit-active MSMEs, they account for just 24% of portfolio value, indicating the mass-market nature of this segment.

Within this, loans below Rs 10 lakh are witnessing rising stress, especially among first-time borrowers. Public sector banks account for over half of such originations, driven in part by government-backed inclusion schemes, MSME Pulse report for May said.

“Compared to retail or large corporates, MSME delinquencies tend to be higher because these are working capital loans and often less structured,” Bunty Chawla, assistant vice president of BFSI at IDBI Capital and Securities, said.

While the overall MSME credit market remains resilient, with delinquencies at a five-year low across most segments, rising early defaults in low-ticket NBFC loans are a cautionary signal.

Over-leverage, if unchecked, could undermine the sector’s recovery and growth prospects, analysts said.

Non-bank lenders expect the stress in low-ticket MSME loans to start easing only when the stress in retail unsecured and microfinance segment comes down, which is about a year from now.