MSME Loans Likely to Face Increased Stress Due to West Asia Conflict: Crisil Rating

MSME Loans May Face Higher Pressure Due to West Asia Conflict

Loans to the micro, small and medium enterprise (MSME) segment are expected to face relatively higher pressure compared with other portfolios due to the ongoing West Asia conflict and the seasoning of loans extended during a phase of high growth, according to a report by CRISIL Ratings. The MSME segment, which accounted for around 19 per cent of bank credit in March 2026, could witness a higher impact from the West Asia conflict.

Government measures are expected to contain the stress on MSMEs, and in turn, the cascading effect on bank non-performing assets (NPAs). The report suggests that the likely introduction of additional support measures, such as a credit guarantee scheme for affected sectors, as seen in the past during periods of exogenous stress such as the Covid-19 pandemic, will support asset quality of banks.

CRISIL Ratings' base case indicates a modest increase in reported gross NPAs in the MSME segment, to 3.4-3.6 per cent this fiscal from 3.2 per cent last fiscal. MSMEs typically have limited financial muscle to absorb higher input costs, supply-chain disruptions, and working capital elongation resulting from the ongoing West Asia conflict.

Earlier, NPAs in the MSME segment had been declining sequentially, driven by banks' improved underwriting and monitoring capabilities, supported by increasing formalisation and data availability in the sector, healthier bank balance sheets that allowed for higher write-offs, and various government and regulatory support measures for MSMEs.

In contrast, the corporate loan segment is expected to see a stable gross NPA of 1.2-1.3 per cent by March 2027, despite multiple sectors facing an impact on their revenues and operating profit from the gas supply shock, crude oil-linked price increases, direct trade exposure, and rupee depreciation.

| Segment | Projected Gross NPA (March 2027) | | --- | --- | | MSME Segment | 3.4-3.6% | | Corporate Loan Segment | 1.2-1.3% |