Micro, Small, and Medium Enterprises (MSMEs) are the new engine of credit growth for banks, outpacing retail loans

Micro, Small and Medium Enterprises (MSMEs) have emerged as the primary drivers of bank credit growth in FY25, outpacing retail and services lending. According to Reserve Bank of India (RBI) data, MSME credit grew by 14.1%, surpassing growth in the retail (11.7%) and services (11.2%) sectors. The share of MSME credit in total bank lending reached an all-time high of 17.7%, with outstanding loans exceeding Rs. 14,30,000 crore (US$ 167.06 billion) by the end of May 2025. Despite a general slowdown in overall bank credit, MSMEs have seen a consistent rise, supported by strong asset quality improvements. The gross Non-Performing Asset (NPA) ratio for MSME loans declined from 4.5% in March 2024 to 3.6% by March 2025, while the subprime borrower share reduced from 33.5% in June 2022 to 23.3% by March 2025.
The improvement in asset quality is further reflected in the sharp fall in the Special Mention Account-2 (SMA-2) ratio, loans overdue by 60–90 days, which dropped to just 0.8% of total MSME credit. Within the sector, small and medium enterprises outperformed micro enterprises in incremental loan growth. Government-backed credit guarantee schemes have also played a crucial role in enhancing access to finance, particularly for vulnerable enterprises. Approximately Rs. 6,28,000 crore (US$ 73.38 billion) was guaranteed under the Credit Guarantee Fund for Micro Units (CGFMU) and the Emergency Credit Line Guarantee Scheme (ECLGS). However, these schemes show relatively higher NPA levels, with CGFMU reporting a 10.8% NPA ratio and ECLGS at 5.6%, owing to their focus on risk-prone borrower segments.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.