MSME bank loans shrink in flagship scheme as lenders turn cautious on tariff hit, NPAs
While the scheme supported around 100,000 projects in each of the last four years, it has aided only 12,707 of them this year.
Bank lending to first-time micro-entrepreneurs has plummeted, signalling tighter credit conditions for small businesses already struggling with cash flow pressures and trade turmoil. In the first six months of the fiscal year, a key central scheme to support such lending managed to sanction just about 12% of what was sanctioned in the entire previous fiscal year, official data showed.
The Prime Minister’s Employment Generation Programme (PMEGP), now in its 17th year, provides loan subsidies to traditional artisans and unemployed youth to float small non-farm ventures. The Centre covers up to 35% of the project cost, with the rest financed by banks. This year, the scheme sanctioned just ₹1,455 crore till 7 October against ₹12,316 crore in all of FY25, data from the micro, small and medium enterprises ministry showed.
In FY25, 108,923 projects were financed with loans of ₹12,316 crore, while 165,725 projects were financed with loans of ₹17,759 crore in FY24. While sanctioning tends to rise in the second half of the fiscal year, industry stakeholders termed this year's decline as “surprisingly low".
“A combination of factors could have led to a dip in bank loan sanctions this fiscal, such as a shortage of margin money provided by the government, which leads to clearances in loans. Another factor is that higher non-performing assets could have dissuaded banks," Anil Bhardwaj, secretary general of the Federation of Indian SMEs, said.
While the scheme supported around 100,000 projects in each of the last four years, it has aided only 12,707 of them this year. The exact year-ago data is not available, but the closest comparable number for FY25 was available till 13 November. By that date, loans worth ₹7,517 crore had been sanctioned for 66,918 projects.
Queries emailed to the MSME ministry remained unanswered.
Why now
A mix of rising loan defaults, tighter underwriting norms, and geopolitical shocks, such as the 50% US tariff on most Indian exports, is prompting banks to become more cautious, industry experts said. On 18 November, Mint reported that non-banking financiers had reduced MSME lending due to rising bad loans.
A 6 October report by Crisil Ratings said NPAs were rising in MSMEs, particularly in the export-oriented sectors. “This fiscal, we see NPAs in the MSME sector increasing moderately to 3.7-3.9% (from 3.6% at the end of FY25). This is primarily due to the recent, steep hike in tariffs announced by the US, which affects export-oriented MSME sub-segments such as textiles, garments and carpets, gems and jewellery, shrimp and processed seafoods and certain segments of the chemicals sector," said Subha Sri Narayanan, director at Crisil Ratings.
According to Ramendra Verma, partner and government segment leader at Grant Thornton Bharat, bad loans at MSMEs are expected to increase "marginally", driven largely by steep US tariffs. "While the jump may not be significant, it may be likely due to export-oriented MSMEs in textiles, gems and jewellery, chemicals and seafood that have been impacted due to geopolitical developments, including tariffs imposed by the US," Verma noted.
Meanwhile, the scrutiny of MSME loans is rising. According to Vinod Kumar, president of the India SME Forum, an industry body representing nearly 100,000 MSMEs, banks are rejecting or holding back loans for projects with weak detailed project reports (DPRs), weak margins, poor credit scores, as well as those ineligible under the PMEGP.
Verma of Grant Thornton agreed that banks were being more conservative, considering the viability of projects and repayment capacity at a time when project costs under the scheme have surged 25% over the last three years due to rising prices of raw materials, technology upgrades, and compliance needs.
“Delays in inspections and compliance checks also slowed disbursals, with many entrepreneurs unable to close loans or access additional credit. Incomplete applications, poor Cibil scores, inability to provide margin money, and activities that fall within the negative list, may also have led to higher rejection rates," Verma added.
Lenders' view
The Small Industries Development Bank of India (Sidbi), in its business sentiment surveys for the first and second quarters of FY26, said MSME optimism has cooled due to global challenges and US tariff measures, reflecting the ongoing troubles of India’s massive small industries sector.
The vigil on MSMEs goes even beyond the tariff factor. Debadatta Chand, managing director and chief executive officer of Bank of Baroda, in a post-earnings call with analysts in May had said the bank has been particularly monitoring cash flows in MSME advances since the slippages seen in Q4 FY25.
Nidhu Saxena, managing director and chief executive of Bank of Maharashtra also said in a Q2 post-earnings call that the bank is lending only to MSMEs that came with a positive investment ranking from TransUnion CIBIL, a credit information provider. “For the MSME loans, we are benchmarking our underwriting to CMR ranks given by the TransUnion CIBIL. So, anything which is below the investment grade, it is not considered in the bank. So only CMR 1, 2, 3, 4 and up to CMR 5, which are defined as investment grade is what—so we have restricted," said Saxena. CMR is CIBIL MSME Rank, where rank 1 has the lowest risk and 10 has the highest.
Bank of Maharashtra, Bank of Baroda and Sidbi are eligible lenders under the scheme, apart from other public sector banks, regional rural banks, private scheduled commercial banks and cooperative banks.
Why MSMEs are crucial
India has more than 70 million registered MSMEs, with more than 95% of these businesses being micro enterprises, earning revenues less than ₹10 crore every year. MSMEs account for about 45% of India's exports, 30% of domestic manufacturing output, and about half of India's 650 million jobs, MSME ministry data shows.
“For micro enterprises, PMEGP is a very important first step which has created millions of entrepreneurs and employment opportunities," said Kumar of India SME Forum.
Under new norms on classifying MSME businesses from 1 April, a micro business is one with an annual revenue up to ₹10 crore and investment up to ₹2.5 crore; a small business can have revenue of up to ₹100 crore and an investment of up to ₹25 crore; while a medium-scale business is one with up to ₹500-crore annual revenue and up to ₹125 crore investment.
What the scheme is all about
The PMEGP scheme provides support for projects valued at up to ₹50 lakh in manufacturing and ₹20 lakh for those in the services sector. Under the scheme, the government covers 10-25% of the project cost as a subsidy, which may go up to 35% in the rural areas, and the rest will be financed by banks. The scheme is limited to non-farm projects, except some processing industries. Certain meat and alcohol-related businesses, for instance, setting up of a restaurant that serves alcohol, and vehicle purchases for business operations are not eligible under the scheme.
Nearly 1 million micro enterprises have been assisted since the inception of the scheme till December 2024 with aid of ₹26,124 crore, providing employment opportunities to over 80 lakh people, the MSME ministry FY25 annual report said.
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