PMEGP sees sharp credit slowdown as loan sanctions plunge 50% in FY26

The lower disbursements coincide with FY26 recording the lowest number of loan applications in a decade, signalling weakening momentum in credit support for small enterprises and job creation under the scheme.

The trend raises questions about the creditworthiness of MSMEs and banks’ risk perception of small business loans amid external uncertainties, even as the Centre has increased the budgetary allocation for subsidized loans to start small non-farm business ventures to ₹4,500 crore (BE) for FY27 from ₹2,548 crore (RE) in FY26.

The fall in bank loan sanctions is likely due to FY26 being the last year of the fifteenth finance commission cycle that began in FY21, with banks facing uncertainty about whether the scheme will continue, said an official directly aware of the development.

The sixteenth finance commission, in its report submitted to the central government in November 2025, noted certain inconsistencies in the reporting of the PMEGP as a subsidy scheme.

“Now that the budget for the PMEGP has been allocated for FY27, we expect bank loan sanctions as well as job creation under the scheme to rebound,” the official said on condition of anonymity.

A senior bank official said the fall also needs to be seen in the context of tighter credit filters and a shift towards improving asset quality. “While sanction numbers appear lower, banks have become more selective in underwriting PMEGP proposals to ensure viability and reduce the risk of future NPAs (non-performing assets)," the official said on condition of anonymity.

There has also been a conscious push towards funding smaller-ticket, sustainable projects rather than larger, one-time exposures, the official added.

Experts, however, attribute it to banks’ experience with previous PMEGP loans that have turned into NPA.

“Even though the PMEGP is meant to promote micro-enterprise lending, banks may still be cautious about taking on loan exposure to new, untested projects. This can lead to slower sanctioning or rejections,” Saurabh Sanyal, secretary general of industry lobby group Associated Chambers of Commerce and Industry of India (Assocham), told Mint.

Weakening demand

FY26 also recorded the lowest number of loan applications since FY17, according to the MSME ministry’s PMEGP portal operated by the Khadi and Village Industries Commission. The portal showed 231,589 applications in FY26, down from 340,348 in the previous fiscal.

In fact, data showed that of the 231,589 applications in FY26, lenders approved fewer than 50,000, or about 21%.

This weakness in credit flow comes when India’s nearly 80 million MSMEs, which employ over 328.2 million people and contribute 31.1% to gross domestic product (GDP), 35.4% to manufacturing output, and 48.58% to exports, have already been navigating a harsh global environment since the pandemic.

Former Reserve Bank of India (RBI) deputy governor R. Gandhi attributed the fall in demand to the uncertain demand situation relating to US tariffs in FY26. “Banks could have also taken a more cautious approach and employed stricter lending practices for these loans,” he added.

Under the PMEGP scheme, the government covers 15-35% of the cost of setting up the business with a margin money subsidy; entrepreneurs cover 5-10%, with 53 financial institutions, including state-run banks, private banks, co-operative banks, and rural regional banks covering the remaining 55-80% of the loan.

Businesses started under the MSME ministry scheme are typically small-scale manufacturing units such as oil mills, furniture-making, readymade garments, and food processing, as well as service enterprises such as mobile phone repair shops, beauty salons, automobile repair workshops, and small restaurants.

Procedurally, banks have to sanction the first tranche of the loan before the government can disburse the margin money subsidy. Government data showed that margin money disbursal was ₹3,093 crore in FY24, fell to ₹2,202 crore in FY25, and recovered to ₹2,457 crore in FY26.

Banks' hesitation to fund new and untested projects also stems from low disbursements under the PMEGP and a high share of bad loans in some regions, flagged by state-level bankers' committees (SLBCs).

Assocham’s Sanyal also said in Assam, bank officials explicitly linked reluctance to sanction PMEGP loans with a high percentage of previously sanctioned loans becoming bad loans.

Ratings agency Crisil in October 2025 flagged that even though NPAs in MSME credit, which made up 17% of all bank credit, have declined to 3.6% by the end of FY25, defaults in this segment may “inch up” in export-driven sectors to 3.7-3.9% in FY26.

Mint's emailed queries to the spokespersons of the ministries of finance and MSME, RBI, State Bank of India, Bank of Baroda, Punjab National Bank, Small Industries Development Bank of India, and Axis Bank on 30 April remained unanswered.

Fewer jobs

As a consequence, job creation under the scheme has also suffered. Data from the MSME ministry’s performance smartboard showed that while 825,752 jobs were created in FY22, only 477,664 were created in FY25, and 531,952 in FY26.

The banking official cited earlier said that employment outcomes under the scheme are increasingly being driven by micro-enterprises with lower capital intensity.

“Many of the projects financed in the past two years are in segments such as services, trading and small manufacturing, which generate higher employment per unit of capital. Additionally, better monitoring and improved implementation at the ground level have helped translate existing sanctions into actual job creation more efficiently,” the official said.

Veeramani C., professor and director, think tank Centre for Development Studies, said employment generation takes time to reflect in data as initial investments start showing positive results, which is why the approximate number of jobs created under the scheme in FY26 has not dipped proportionally with the plummeting bank loan sanctions from the previous fiscal.