MSME Lending Outpaced Other Sectors Despite Bank Credit Deceleration: RBI

Despite a broad deceleration in bank credit growth, the share of credit to the MSME sector in total non-food bank credit has been growing steadily and its growth has outpaced that in other sectors during 2024-25, according to the Reserve Bank of India. According to the data by the central bank in its latest Financial Stability Report, credit to MSMEs grew by 14.1 per cent in comparison to 6.9 per cent for industry excluding MSMEs, 11.2 per cent for services excluding MSMEs, 9.1 per cent for agriculture, 11.7 per cent for retail, and 10.8 per cent for overall non-food credit. 

Moreover, the share of credit to MSMEs in non-food bank credit also increased to 17.7 per cent as of March 2025. While credit to the micro enterprises had the highest share of 49 per cent in total MSME credit in comparison to 31 per cent share of small enterprises, and 20 per cent of medium enterprises, it recorded slower incremental growth in FY25 compared to small and medium enterprises.  

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With respect to the asset quality, the gross NPA ratio of the MSME portfolio of scheduled commercial banks (SCBs) narrowed from 4.5 per cent in March 2024 to 3.6 per cent as of March 2025. This was also reflected in the significant moderation in the SMA-2 (special mention account) ratio, an indicator of incipient stress, to 0.8 per cent from 1.3 per cent as of March 2024. 

In terms of amount outstanding, the share of sub-prime borrowers in the MSME portfolio of the SCBs has decreased from 33.5 per cent in June 2022 to 23.3 per cent in March 2025. Sub-prime borrowers are those with lower credit scores or limited credit history. 

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PSBs had a higher share of sub-prime borrowers in their MSME portfolio compared to private banks and NBFCs. According to the report, the government’s credit guarantee schemes improved the flow of credit to the MSME sector, especially vulnerable enterprises, with approximately Rs 6.28 lakh crore guaranteed under two flagship schemes -- Credit Guarantee Fund for Micro Units (CGFMU) and the Emergency Credit Line Guarantee Scheme (ECLGS). The NPA ratio in both schemes remains contained – 9.9 per cent in CGFMU and 6.4 per cent in ECLGS as of March 2025, despite the riskiness of borrowers.