India’s public sector banks (PSBs) are reporting a positive shift in the health of their loan books for micro, small, and medium enterprises (MSMEs).
According to data presented by the Ministry of Finance in the Rajya Sabha on Tuesday, the gross non-performing asset (NPA) ratio for PSBs’ MSME loans has steadily fallen in recent years.
MSME NPAs Show Marked Decline
Minister of State for Finance, Pankaj Chaudhary, said in a written reply that the gross NPA ratio of MSME loans dropped to 6.18% by the end of March 2025, compared to 7.99% in FY24 and a much higher 12.8% in FY22.
This indicates a consistent recovery in the segment over the last three financial years.
While this overall decline suggests improving repayment capacity among MSME borrowers, officials noted that the trend is not uniform across all enterprise sizes.
Micro Enterprises Still Struggling
Despite the overall improvement, stress levels remain high in the micro segment, which includes the smallest businesses.
These businesses continue to face limited access to formal credit and higher vulnerability to market fluctuations.
The Finance Ministry highlighted that while medium and small enterprises have benefited from various schemes and a recovering economy, micro enterprises are yet to gain equally.
Government Measures to Support MSMEs
The Ministry of Finance attributed the improved loan performance to a range of measures taken by the government.
This includes schemes like the Emergency Credit Line Guarantee Scheme (ECLGS), subordinate debt schemes, and interest subvention for MSMEs.
In addition, PSBs have been directed to implement credit monitoring systems and improve their risk assessment practices for MSME lending. These actions have helped reduce defaults and improve credit discipline in the sector.
Parliamentary Response Highlights Trends
The data was provided in response to a question on whether MSMEs were defaulting more post-pandemic. Minister Chaudhary clarified that the reverse is true for the larger segment of small and medium enterprises.
However, the government remains cautious about the financial health of micro enterprises, which form the bulk of MSME borrowers.
Credit Flow and NPA Management
The Finance Ministry emphasized that credit flow to MSMEs remains a priority, with special attention on credit guarantee and collateral-free loan schemes.
According to the Reserve Bank of India (RBI), total bank credit to MSMEs stood at ₹21.8 lakh crore as of March 2025. Within this, public sector banks account for nearly 55%, underscoring their key role in supporting the sector.
To address NPAs, banks have also adopted early warning systems and credit restructuring mechanisms, helping avoid defaults through timely intervention.
MSME Sector Crucial to India’s Economy
The MSME sector contributes around 30% to India’s GDP and is a major source of employment, especially in rural and semi-urban areas.
Therefore, any positive change in the sector’s loan health has a ripple effect on the wider economy.
Improved loan recovery allows banks to lend more, creating a virtuous cycle of growth and credit availability.
Future Outlook and Policy Direction
Experts believe that while the NPA ratio has improved, sustained reforms and digital adoption will be critical for long-term stability.
The government is expected to continue expanding digitized credit platforms, ensure better financial literacy, and offer targeted support to micro enterprises in the coming years.
The Union Budget 2025–26 is also expected to focus on schemes that promote access to finance and reduce stress in high-risk segments.