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Banks (Finance)

Banks and NBFCs Overhaul MSME Underwriting Amid Rising Delinquencies

Strategic Insights

— 1 min read

Banks and non-banking finance companies (NBFCs) are revamping their micro, small and medium enterprise (MSME) underwriting and risk models as early signs of stress emerge in the microfinance segment. Rising delinquencies, particularly in smaller ticket-size loans, are prompting lenders to adopt more nuanced credit assessment frameworks. This shift is driven by the need to mitigate risks and maintain transparency in credit information reporting.

Key Takeaways:

  • Banks and NBFCs are recalibrating their underwriting models to address rising delinquencies in MSME loans, particularly in smaller ticket-size loans.
  • Lenders are leveraging alternative data such as GST filings, cash-flow patterns, and digital footprints to gain a more holistic view of a borrower's creditworthiness.
  • DBS Bank India waived off prepayment and foreclosure charges across registered MSMEs, allowing businesses to repay loans early without penalty.
  • The Reserve Bank of India (RBI) mandated the frequency of credit information reporting to a fortnightly basis to improve transparency.
  • Microfinance institutions (MFIs) have strengthened their guardrails for new-to-credit customers and curtailed exposure to highly-leveraged borrowers in response to early signs of stress in smaller loans.
  • According to a Motilal Oswal report, on-time collection is becoming a critical metric in the microfinance space, measuring the percentage of dues collected within the centres.
  • MFIs are expected to diversify beyond traditional joint liability group (JLG) loans and explore new offerings such as unsecured business loans, MSME, micro-LAP, and gold loans.

Statistics:

  • The outstanding MSME credit for banks dealing in organised MSME borrowers (excluding sole proprietors and small enterprises) rose 14.1% on year in 2024-25 (RBI Financial Stability Report, June 2024).
  • The share of MSME credit in total bank credit reached a record high of 17.7% in 2024-25 (RBI Financial Stability Report, June 2024).
  • DBS Bank India's waiver of prepayment and foreclosure charges is expected to benefit registered MSMEs.

Sources:

  • Kotak Mahindra Bank
  • Credifin
  • DBS Bank India
  • Reserve Bank of India (RBI)
  • Motilal Oswal report on microfinance

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