MSMEs new engine of credit growth for banks, outpace retail loans

MSMEs are emerging as the leading engine of credit growth for banks, overtaking retail lending. During FY 2024–25, MSME loans surged by 14.1%, compared to 11.7% growth in retail and 11.2% in services, RBI data showed. Share of MSME credit in total bank credit stood at 17.7%, an all-time high. Loans to this segment stood at more than Rs 14.3 lakh crore at the end of May 2025.

“Despite a broad deceleration in bank credit growth, the share of credit to the micro, small and medium enterprises (MSME) sector in total non-food bank credit has been growing steadily and its growth has outpaced that in other sectors during 2024-25,” RBI noted in the financial stability report.

Within the MSME sector, credit to the micro enterprises, which formed 49% of total credit to the MSME sector, witnessed slower incremental growth in 2024-25 compared to small and medium enterprises.


The upswing in lending came with stronger asset quality. The proportion of subprime borrowers in banks’ MSME portfolios declined significantly, from 33.5 % in June 2022 to just 23.3 % by March 2025.

Asset quality also showed improvement with the gross NPA ratio of MSME portfolio of banks falling from 4.5% in March 2024 to 3.6% at the end-March 2025.

This is also reflected in the significant moderation in SMA-2 (loans due beyond 60-90 days) ratio, an indicator of incipient stress which fell to 0.8% of total MSME loans.

The government’s credit guarantee schemes improved flow of credit to the MSME sector, especially vulnerable enterprises, with approximately Rs 6.28 lakh crore guaranteed under two flagship schemes, the Credit Guarantee Fund for Micro Units (CGFMU) and the Emergency Credit Line Guarantee Scheme (ECLGS).

The NPA ratio in both schemes was relatively higher versus the sector wide ratios, as these loans are directed towards risky borrowers.

Under CGFMU, the NPA ratio for the banking system stood at 10.8% while it was 5.6% under the ECLGS.