Business EconomyPosted at: Jun 12 2026 3:44PM


MSME loan growth slows as global uncertainty weighs on credit demand

New Delhi, June 12 (UNI) Amid increasing global uncertainty, credit growth in the micro, small, and medium enterprise (MSME) sector has started showing signs of moderation, with loan growth declining to 13 per cent year-on-year in April 2026 from 20 per cent in December 2025, according to a report by IIFL Capital.
The brokerage, however, expects the impact of the slowdown to be cushioned by the government's Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, which was announced in May 2026 to support MSMEs facing challenges arising from the West Asia conflict.
Under the latest version of the scheme, the government has extended 100 per cent credit guarantee coverage for loans provided to standard MSMEs, with the total loan amount capped at Rs 1 billion per borrower.
IIFL Capital estimates that the scheme could lead to an additional credit flow of around Rs 2.55 trillion, equivalent to nearly 5 per cent of outstanding MSME loans. As of the end of May, lenders had already sanctioned loans worth Rs 350 billion under the initiative.
"We believe ECLGS 5.0 should cushion the potential impact as the earlier schemes had improved credit activity, fund utilisation, and lowered NPA and forward flow rates," the report said.
The slowdown has been more visible in manufacturing and trading segments, while public sector undertakings (PSUs) have also lost around three percentage points of market share over the past two years.
Overall MSME credit momentum has weakened, with loan growth by value and volume slowing to 3 per cent and negative 3.5 per cent, respectively, in the current calendar year so far, compared with 10 per cent and 3 per cent during the same period last year.
On asset quality, the report highlighted a marginal deterioration, with the PAR30 delinquency metric rising 40 basis points month-on-month in April 2026. However, the increase appears seasonal at this stage. Stress levels have risen relatively more among micro and small borrowers, PSU lenders, cash credit and term loan categories, as well as manufacturing and service industries.
Despite near-term pressure, larger MSME borrowers continue to show resilience. According to the report, only 17 per cent of borrowers account for nearly 70 per cent of total MSME loans, and this segment has lower delinquency rates compared with single-loan borrowers.
Meanwhile, lenders have increasingly shifted towards higher-quality borrowers, with the share of very low-risk borrowers rising by four percentage points over the last two years.
The report suggests that while MSME credit growth has moderated, policy support through ECLGS 5.0 and improving borrower quality could help maintain stability in the sector. UNI VK SAS
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