Rising Stress in MSME and Vehicle Finance Segments

Strategic Insights -

Lenders in India are facing increasing stress in various segments of their portfolios, with micro and small-medium enterprises (MSMEs) and vehicle finance emerging as areas of concern. Data from credit bureaus and financial institutions reveals that the proportion of MSME borrowers holding three to five active loans accounts has increased to nearly 22% of total MSME credit. Meanwhile, the portfolio at risk (PAR) in the unsecured business loan category has risen by 20 basis points year-on-year. Rikin Shah, senior vice president at IIFL Capital, attributed this trend to ageing-related unsecured retail loan provisions, expecting credit costs to rise by 20 basis points year-on-year in FY26.

Key Takeaways:

  • Data from CRIF and IIFL Capital shows that the proportion of MSME borrowers holding three to five active loans accounts increased to nearly 22% of total MSME credit.
  • The portfolio at risk (PAR) in the unsecured business loan category rose by 20 basis points year-on-year.
  • IIFL Capital expects credit costs to rise by 20 basis points year-on-year in FY26 due to ageing-related unsecured retail loan provisions.
  • MSME loans expanded at a compound annual growth rate (CAGR) of 27% in the past five years to Rs 40 lakh crore at the end of March.
  • Fresh originations slowed 7% in 2024-2025, largely due to weaker demand from micro borrowers.
  • The PAR for loans due between 31 days and 180 days in the micro MSME segment stood at 4.2% at the end of March.
  • Bad loans in the small-MSME loans of up to Rs 10 lakh segment increased to 5.8% at the end of January, compared to 5.1% a year earlier.
  • Sireesh Ganapathy, India head-financials at Macquarie Capital, highlighted growing stress in small-MSME loans, attributing it to balance sheet stress and stretched working capital cycles.
  • The unsecured individual business loan category is seeing rising stress, with a high share of "not scored" and "very high-risk" borrowers.
  • Banks reported a high share of "not scored" and "very high-risk" borrowers, accounting for 10% and 16% of their borrower mix respectively in 2024-25.
  • PAR for these loans between 31 and 180 days deteriorated by 20 basis points year-on-year to 3.6% during the fiscal.

Statistics:

  • Proportion of MSME borrowers holding three to five active loans accounts: 22%
  • Portfolio at risk (PAR) in the unsecured business loan category: 20 basis points year-on-year
  • Expected credit costs rise: 20 basis points year-on-year in FY26
  • MSME loans growth rate: 27% CAGR in the past five years
  • Total MSME credit: Rs 40 lakh crore at the end of March
  • Fresh originations growth: -7% in 2024-2025
  • PAR for loans due between 31 days and 180 days in the micro MSME segment: 4.2%
  • Bad loans in small-MSME loans of up to Rs 10 lakh: 5.8%
  • PAR for unsecured individual business loans: 3.6%
  • PAR for small-ticket personal loans (less than Rs 1 lakh) between 91 and 180 days: 3.3%

Sources:

  • [1] Data from CRIF and IIFL Capital
  • [2] Rikin Shah, senior vice president at IIFL Capital
  • [3] Sireesh Ganapathy, India head-financials at Macquarie Capital
  • [4] Nitin Aggarwal, head-BFSI at Motilal Oswal Securities
  • [5] Pramod Shenoi, head of Asia-Pacific Research and head of financials at CreditSights, a Fitch company