A significant shift is underway in India's lending landscape for small businesses, with private sector banks solidifying their dominance while non-banking financial companies (NBFCs) make substantial gains. This trend comes at the expense of public sector banks (PSBs), whose market share has seen a notable decline over the last two years, according to a pivotal report.
The Changing Hierarchy of Lenders
The study, jointly released by the Small Industries Development Bank of India (SIDBI) and credit bureau CRIF High Mark, defines a "small business" as an enterprise with a total formal credit exposure not exceeding Rs 5 crore. As of September 2025, private banks remain the primary source of enterprise loans, though their share exhibits minor fluctuations. Public sector banks, while still a major force, have seen their market share erode from 39.3% in September 2023 to 37.8% in September 2025.
This decline in PSB share has largely been captured by NBFCs, indicating a gradual but clear transformation in where small businesses seek funding. The rise of NBFCs is particularly pronounced in lending to sole proprietorships, where they now command an impressive over 41% share of the market.
Robust Growth in Credit Exposure
Despite the shifting shares among lenders, the overall pie is expanding vigorously. The aggregate credit exposure to India's small businesses reached a massive Rs 46 lakh crore by September 2025. This represents a robust year-on-year growth of 16.2%, with a quarter-on-quarter increase of 1.5%. The number of active loan accounts also saw strong growth, rising by 11.8% year-on-year to reach 7.3 crore accounts.
The report credits this sustained momentum to comprehensive policy initiatives aimed at the MSME sector. The implementation of several government-backed credit schemes has played a pivotal role in driving this credit expansion. However, the growth rate has moderated from the previous quarter's 19.3% year-on-year figure. Analysts suggest this moderation could reflect more cautious lending practices by institutions as well as seasonal variations in demand.
Product Mix and Unsecured Lending Trends
An analysis of the product mix reveals that working capital loans dominate enterprise lending, constituting about 57% of the outstanding portfolio. Term loans continue to be crucial for funding capital expenditure needs. For sole proprietors, the landscape is different: loans against property (LAP) form the largest component, followed by business loans and commercial vehicle financing.
In a notable trend, unsecured lending maintained strong momentum, growing at a significant 31% year-on-year. This growth occurred despite ongoing concerns about stress in certain segments of unsecured credit, highlighting the diverse risk appetite and product strategies of different lenders.
A key insight from the data is that the growth in credit outstanding is outpacing the growth in the number of loan accounts. This indicates a steady expansion in the average ticket size of loans being disbursed to small businesses, suggesting lenders are funding larger requirements or more established enterprises.
