India banks turn cautious on MSME lending as stress signals emerge: Report

have turned cautious on lending to small businesses as early signs of stress emerge in the micro, small and medium enterprises (MSME) segment, prompting tighter underwriting and a moderation in , showed a report by 360 ONE Capital citing a report.

MSME loan growth slowed to 12.7% year-on-year in April 2026 from around 18%-20% seen in previous quarters, as lenders reassessed risk and curtailed fresh disbursals, data from CRIF High Mark showed.

The slowdown was sharper in active loans, which advanced just 2.5% year-on-year compared with 6%-9.4% earlier, indicating a more cautious stance by lenders, the CRIF High Mark report showed.

Sectoral credit growth data from the Reserve Bank of India (RBI) for April – the latest available – also showed lending to the MSME segment remained stagnant at Rs 14.49 lakh crore, compared with Rs 15 lakh crore in March.

“Banks have tightened their underwriting and monitoring mechanisms,” 360 ONE said, reflecting rising caution amid evolving macroeconomic and geopolitical risks. Early stress indicators have begun to emerge in .

According to CRIF High Mark data, delinquencies edged up in April, with 31–90 day past dues rising to 1.8% and 90+ day delinquencies to 7.8%, compared with 1.6% and 7.6% in the preceding quarter.

The rise has been more pronounced in the small and medium segments, with early delinquencies in small enterprises rising to 1.5% from 1.3% and in medium enterprises to 0.8% from 0.7% in April.

(PSB) saw a sharper increase in stress, with 31–90 day delinquencies rising to 3% from 2.7%, compared with largely stable trends at private banks, according to CRIF High Mark data.

Troubles Beyond Home

The report flagged external risks as a key trigger for the emerging stress cycle.

The West Asia conflict has disrupted supply chains and pushed up input costs, which could erode the repayment capacity of MSME borrowers, particularly in sectors such as textiles, chemicals and auto components.

As a result, “banks remain cautious on the second order impact on the MSME borrowers,” the brokerage said, adding that the effect on asset quality may take time to play out.

The moderation comes despite strong structural growth in the segment over the past few years, when MSME credit expanded faster than overall non-food credit, supported by formalisation, government guarantees and better risk-adjusted yields, according to 360 ONE Capital.

However, the current cycle is seeing lenders pull back, with a cautious stance on fresh lending and tighter monitoring of existing exposures.

Analysts said the impact of any deterioration in asset quality would be uneven across banks. PSBs, which have historically reported higher slippage and GNPA ratios in MSME portfolios, are likely to be more vulnerable to rising credit costs.

“Any increase in the credit cost would have a disproportionate impact on PSBs’ RoA,” 360 ONE said.

While early-stage stress remains limited for now, the brokerage said asset quality in the MSME segment would be a key monitorable going forward, particularly given continued input cost pressures, supply disruptions and cash flow challenges.

Policy support is expected to provide a buffer, with such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the Emergency Credit Line Guarantee Scheme (ECLGS) likely to cushion the impact by providing credit backstops and liquidity to borrowers.

However, the report noted that some borrowers may be availing such facilities as a precaution, signalling underlying caution among firms.

Looking ahead, 360 ONE said it remains watchful on the trajectory of MSME asset quality, even as it continues to prefer private sector banks and select PSBs, given their relatively stronger underwriting and balance sheet resilience. The brokerage added that while the current stress signals are still nascent, a sustained rise in delinquencies or credit costs could weigh on profitability, especially for lenders with higher exposure to the segment.