MSME Loans Show Early Stress Amid West Asia Crisis
A new report from 360 ONE Capital indicates that India's micro, small, and medium enterprises (MSME) loan segment is exhibiting early signs of stress. Delinquency levels increased in April 2026, even as banks remain cautious about the potential impact of supply-chain disruptions and rising input costs linked to the West Asia conflict.
Second-Order Effects on Asset Quality
The report notes that while the conflict's impact has not yet materially reflected in banks' asset quality, lenders are increasingly concerned about second-order effects on MSME borrowers. The conflict has disrupted supply chains and increased input costs, potentially affecting repayment capacity in sectors such as fertilisers, ceramics, polyester textiles, specialty chemicals, flexible packaging, auto components, diamond polishing, and basmati rice exports.
Delinquency Data Shows Initial Deterioration
Data from CRIF High Mark points to an initial deterioration in repayment trends. In April 2026, PAR 31-90 and PAR 90+ for MSME loans inched up to 1.8% and 7.8%, respectively, compared to 1.6% and 7.6% in the fourth quarter of FY26. Stress is more visible in public sector banks (PSBs) than private lenders. PAR 31-90 for PSBs increased to 3% in April 2026 versus 2.7% in 4QFY26, while for private banks it remained stable at 0.7%.
Higher Impact on Public Sector Banks
Historically, PSBs have had higher slippage and gross non-performing asset ratios within the MSME segment compared to private banks. The report believes disruptions due to the geopolitical situation are likely to have a higher impact on asset quality for PSBs.
Credit Growth Moderates
MSME loan growth slowed to 12.7% year-on-year in April 2026, down from around 18-20% during the second and third quarters of FY26. Growth within active loans slowed to 2.5% year-on-year versus 6% and 9.4% in the previous quarters, reflecting cautious lending due to the Middle East war.
Government Schemes to Cushion Impact
Despite emerging stress, the brokerage believes government-backed guarantee schemes such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the Emergency Credit Line Guarantee Scheme (ECLGS) are likely to cushion the impact on the banking system.
