India's MSME Boom: Can Strong Credit Growth Withstand New Risks?

Introduction: A Tale of Growth and Growing Concern

India's Micro, Small, and Medium Enterprise (MSME) sector has been a significant driver of credit growth, demonstrating resilience and momentum. As of September 2025, total credit exposure to MSMEs reached a substantial ₹43.3 lakh crore, marking a 17.8% year-on-year increase. This expansion reflects a maturing market, with lenders showing disciplined behaviour and portfolio quality steadily improving. However, this positive trajectory is now set against a backdrop of increasing global uncertainty. Escalating geopolitical tensions, persistent economic volatility, and a complex digital risk landscape are creating significant headwinds, forcing banks and businesses alike to recalibrate their strategies from aggressive expansion to cautious, sustainable growth.

The Engine Room: MSME Credit Expansion in Detail

The latest data from the CRIF High Mark's MSMEx Spotlight Report paints a picture of a robust lending environment. The 17.8% annual growth in credit exposure was not just about volume; it also signalled a structural shift. Portfolio growth outpaced the 5.7% rise in the number of active borrowers, indicating a clear trend towards larger ticket-size loans and a more mature customer base. Small and medium-sized enterprises are increasingly capturing a larger share of the credit pie. The share of small businesses in total exposure rose from 38.4% to 39.5% year-on-year, while medium enterprises saw their share increase from 22.5% to 23.1%. In contrast, while micro-enterprises still account for the majority of active loans at 86.4%, their overall share of credit exposure remained stable, suggesting that the primary momentum is with larger businesses.

Lender Landscape and Regional Distribution

The lending landscape for MSMEs is diverse, with different financial institutions catering to specific segments. Public Sector Undertaking (PSU) banks remain the primary lenders for micro-enterprises, holding a 36.3% market share. However, for larger businesses, private banks take the lead, commanding a 46.4% share in the small enterprise segment and 47% in the medium segment. Non-Banking Financial Companies (NBFCs) are also steadily expanding their footprint across the board, increasing their share to 20.1% in micro, 13.9% in small, and 15.7% in medium enterprise lending. Geographically, Maharashtra continues to be the largest market for MSME credit, with an outstanding exposure of ₹7 lakh crore. It is followed by Gujarat and Tamil Nadu, with exposures of ₹4 lakh crore and ₹3.7 lakh crore, respectively. Notably, Uttar Pradesh and Telangana have emerged as the fastest-growing states, reporting quarterly growth of 5.4% and 6.5%.

Asset Quality: A Bright Spot

Amidst the rapid credit expansion, asset quality has shown encouraging improvement. The overall Portfolio at Risk (PAR) for loans overdue by 91–180 days stood at a healthy 1.6% in September 2025, a notable improvement from the previous quarter. This suggests that the growth has not come at the expense of prudent lending standards. A significant number of borrowers have migrated to 'Very Low' and 'Low Risk' categories across all segments. This positive trend is attributed to better repayment behaviour, enhanced data-driven underwriting by lenders, and the increasing formalisation of the MSME sector, which provides greater visibility into their financial health.

Emerging Headwinds: Geopolitical and Economic Pressures

Despite the strong domestic performance, external risks are casting a long shadow. The FICCI-EY Risk Survey 2026 highlights that Indian business leaders are increasingly concerned about global instability. Geopolitical tensions in the Middle East, for instance, threaten to tighten funding conditions for Indian banks and NBFCs as foreign investors may pull capital from emerging markets. This could increase borrowing costs and constrain liquidity. Furthermore, 68% of survey respondents identified economic slowdowns and market disruptions as significant threats, while 67% cited sustained inflation and economic volatility as major concerns affecting business planning and operations. For MSMEs, these pressures translate into higher input costs, potential supply chain disruptions, and the risk of a slowdown in domestic demand, all of which could impact their ability to service debt.

The Digital and Operational Tightrope

Beyond macroeconomic concerns, businesses face a complex array of operational challenges. The FICCI-EY survey reveals that digital risks are a top priority. A significant 61% of respondents view cyber-attacks and data breaches as major financial and reputational threats. The rapid pace of technological change is another double-edged sword; 59% of businesses feel that their limited adoption of emerging technologies like AI is hindering operational effectiveness. Compounding these issues are persistent workforce challenges, with 64% of organizations reporting that talent shortages and skill gaps are impacting their performance and long-term growth capabilities. These interconnected risks require an integrated management approach that links technology, governance, and human capital.

Lenders Shift Towards Calibrated Growth

In response to this evolving risk landscape, the financial sector is adopting a more cautious stance. Discussions at the Antique Stock Broking BFSI Conference revealed a sector-wide shift in strategy. Lenders are now prioritising asset quality, profitability, and risk calibration over the aggressive expansion seen in previous years. While credit demand remains stable, it is skewed towards secured products like home loans and MSME loans against property. Unsecured lending and new credit card issuance have moderated significantly. Banks are also focusing on mobilising granular, low-cost CASA deposits rather than relying on bulk deposits to protect their margins. This strategic pivot underscores a collective move toward building resilience and ensuring sustainable, long-term growth rather than chasing short-term volume.

Conclusion: Navigating the Path Ahead

India's MSME credit story is at a crucial juncture. The sector's foundational strength, marked by impressive credit growth and improving portfolio quality, is undeniable. However, the path forward is clouded by a convergence of geopolitical, economic, and operational risks. The resilience of the MSME sector and the banking system will be tested by these external pressures. The proactive shift by lenders towards a more risk-calibrated approach is a prudent response to this uncertainty. Future success will depend not just on sustaining growth but on the ability of businesses and financial institutions to anticipate challenges, manage interconnected risks, and build a truly resilient economic foundation.