Sharp Decline in MSME Lending Under Flagship Scheme
Bank loans to first-time micro-entrepreneurs have witnessed a dramatic collapse during the first half of the current fiscal year, indicating tightening credit conditions for small businesses already grappling with cash flow pressures and international trade disruptions. Official data reveals that the Prime Minister's Employment Generation Programme (PMEGP), a key central government initiative, has sanctioned merely 12% of the total amount approved during the entire previous financial year.
Alarming Numbers Reveal Deepening Credit Crunch
The PMEGP scheme, now in its 17th year, provides loan subsidies to traditional artisans and unemployed youth to establish small non-farm ventures. The government covers up to 35% of the project cost as a subsidy, with banks financing the remaining amount. However, data from the micro, small and medium enterprises ministry shows that until October 7, the scheme sanctioned just ₹1,455 crore, compared to ₹12,316 crore throughout FY25.
In terms of project count, the situation appears even more stark. While the scheme supported approximately 100,000 projects annually over the last four years, it has aided only 12,707 projects this fiscal year. For comparison, by November 13 of FY25, loans worth ₹7,517 crore had been sanctioned for 66,918 projects.
Industry stakeholders acknowledge that sanctioning typically increases during the second half of the fiscal year, but they have described this year's decline as surprisingly low.
Multiple Factors Driving the Lending Slowdown
Experts point to a confluence of factors behind the sharp contraction in bank loan sanctions. Anil Bhardwaj, Secretary General of the Federation of Indian SMEs, identified several key issues: A shortage of margin money provided by the government, which facilitates loan clearances, and higher non-performing assets (NPAs) that have made banks more cautious.
The rising caution among lenders stems from a challenging economic environment. A 6 October report by Crisil Ratings highlighted that NPAs were increasing in the MSME sector, particularly within export-oriented industries. Subha Sri Narayanan, Director at Crisil Ratings, projected that NPAs would rise moderately to 3.7-3.9% this fiscal year, up from 3.6% at FY25's end.
This increase is primarily attributed to the steep hike in tariffs announced by the US, which affects Indian exports in sectors like textiles, garments, gems and jewellery, seafood, and chemicals.
Ramendra Verma, Partner at Grant Thornton Bharat, echoed this view, noting that bad loans are expected to increase marginally, driven largely by these US tariffs. He added that banks are adopting a more conservative approach, carefully scrutinizing project viability and repayment capacity, especially as project costs under the scheme have surged by 25% over three years due to rising raw material prices and compliance needs.
Increased Scrutiny and Tighter Lending Norms
Banks are now rigorously evaluating PMEGP applications. According to Vinod Kumar, President of the India SME Forum, lenders are rejecting or holding back loans for projects with weak detailed project reports (DPRs), insufficient margins, poor credit scores, or those falling outside the scheme's eligibility criteria.
This heightened vigilance is evident from statements by bank executives. Debadatta Chand, MD & CEO of Bank of Baroda, stated in May that the bank has been closely monitoring cash flows in MSME advances since witnessing slippages in Q4 FY25.
Similarly, Nidhu Saxena, MD & CEO of Bank of Maharashtra, revealed that the bank now lends only to MSMEs with a positive investment ranking from TransUnion CIBIL, effectively restricting lending to borrowers with a CIBIL MSME Rank (CMR) of 1 to 5.
The sentiment among MSMEs has also cooled, as reflected in business surveys by the Small Industries Development Bank of India (Sidbi), citing global challenges and US tariff measures.
Why This Matters for India's Economy
The health of the MSME sector is crucial for India's economic stability. India has over 70 million registered MSMEs, with more than 95% being micro-enterprises. This sector accounts for approximately 45% of India's exports, 30% of domestic manufacturing output, and about half of the country's 650 million jobs.
Vinod Kumar emphasized the scheme's importance, stating, For micro enterprises, PMEGP is a very important first step which has created millions of entrepreneurs and employment opportunities. Since its inception until December 2024, the PMEGP has assisted nearly 1 million micro enterprises with aid of ₹26,124 crore, generating employment for over 80 lakh people.
