Indian Banks Tighten MSME Loans Amid Stress

Indian banks have begun to tighten their lending to the MSME sector as early indicators of financial stress surface. According to a 360 ONE Capital report citing CRIF High Mark data, MSME loan growth slowed significantly to 12.7% year-on-year by April 2026. This moderation is more pronounced in active loans, which expanded by only 2.5% annually.

Delinquency rates have edged up, with 31-90 day past due loans rising to 1.8% and 90+ day delinquencies reaching 7.8% in April 2026. This trend is more evident in small and medium enterprise segments. Public sector banks have observed a sharper increase in 31-90 day delinquencies, rising to 3% compared to largely stable trends in private banks.

External factors like the West Asia conflict, which has disrupted supply chains and increased input costs, are identified as key triggers for this emerging stress. These disruptions may impact the repayment capacity of MSME borrowers, particularly in sectors such as textiles and auto components.

Despite past strong growth fueled by formalization and government support, lenders are now reassessing risks. While early-stage stress remains limited, asset quality in the MSME segment will be a critical monitorable. Government schemes are expected to provide a buffer, but caution prevails among firms and lenders.