Loans to the micro, small and medium enterprise (MSME) segment are expected to face relatively higher pressure compared with other portfolios due to the ongoing Middle East conflict and the seasoning of loans extended during a phase of high growth, CRISIL Ratings said in a report.
"The MSME segment, which accounted for around 19% of bank credit in March 2026, could, however, witness a higher impact from the West Asia conflict," the report said.
Government measures are expected to contain the stress on MSMEs, and in turn, the cascading effect on bank NPAs, the report added. The likely introduction of additional support measures, such as a credit guarantee scheme for affected sectors, as seen in the past during periods of exogenous stress such as the Covid-19 pandemic, will support asset quality of banks.
"Our base case indicates a modest increase in reported gross NPAs in the MSME segment, to 3.4-3.6% this fiscal from 3.2% last fiscal. MSMEs typically have limited financial muscle to absorb higher input costs, supply-chain disruptions and working capital elongation resulting from the ongoing West Asia conflict," said Subha Sri Narayanan, Director at Crisil Ratings.
Earlier, NPAs in the MSME segment had been declining sequentially, driven by banks' improved underwriting and monitoring capabilities, supported by increasing formalisation and data availability in the sector, healthier bank balance sheets that allowed for higher write-offs, and various government and regulatory support measures for MSMEs, report said.
It further added that corporate loan segment to see a stable gross non-performing assets (NPA) of 1.2-1.3% by March 2027, despite multiple sectors facing an impact on their revenues and operating profit from the gas supply shock, crude oil-linked price increases, direct trade exposure and rupee depreciation.
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