Loans flow at a faster clip into MSMEs; asset quality up, too
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Mumbai: MSMEs, often cited by economic policymakers as crucial to last-mile job creation, raced ahead of retail last fiscal in drawing formal banking credit, which has remained rather circumspect lately in aggregate despite a cumulative one percentage-point lowering in policy rates so far this calendar year."Despite a broad deceleration in bank credit growth, the share of credit to the micro, small and medium enterprises (MSME) sector in total non-food bank credit has been growing steadily and its growth has outpaced that of other sectors during FY25," the Reserve Bank of India RBI ) noted in the latest edition of the financial stability report (FSR). In FY25, MSME loans surged 14.1%, compared to 11.7% growth in retail and 11.2% in services, central bank data showed. The share of MSME credit in total bank credit stood at 17.7%, an all-time high. Loans to this segment stood at more than ₹14.3 lakh crore at the end of May 2025.Within the MSME sector, credit to the micro enterprises, which formed 49% of total credit to the MSME sector, witnessed slower incremental growth in FY25 compared to small and medium enterprises. The upswing in lending came with stronger asset quality.The proportion of subprime borrowers in banks' MSME portfolios declined significantly, from 33.5% in June 2022 to just 23.3% by March 2025. Asset quality also showed improvement with the gross NPA ratio of MSME portfolio of banks falling from 4.5% in March 2024 to 3.6% at the end-March 2025.This is also reflected in the significant moderation in SMA-2 (special mention accounts due beyond 60-90 days) ratio, an indicator of incipient stress which fell to 0.8% of total MSME loans.The government's credit guarantee schemes improved flow of credit to the MSME sector, especially vulnerable enterprises, with approximately ₹6.28 lakh crore guaranteed under two flagship schemes, the Credit Guarantee Fund Scheme for Micro Units (CGFMU) and the Emergency Credit Line Guarantee Scheme (ECLGS).The NPA ratio in both the schemes was relatively higher versus the sector-wide ratios, as these loans are directed towards more risky borrowers.Under CGFMU, the NPA ratio for the banking system stood at 10.8% while it was 5.6% under the ECLGS.
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