NBFCs Go Easy on MSMEs as NPAs Bite
Non-bank lenders are turning cautious on lending to small enterprises, as defaults rise following a lending spree to borrowers with weak credit profiles.
Bajaj Finance, IIFL Finance, Shriram Finance and Ugro Capital are among lenders that have slowed collateral-free MSME lending in the September quarter. A clear shift is emerging: more secured loans, stricter borrower scrutiny, and higher provisioning for potential losses.
Bajaj Finance scaled back MSME lending after gross bad loans hit 2.47%, up from 1.83% last quarter and 1.65% a year ago. India’s largest NBFC now expects MSME loan book growth of just 11–12% in FY26, sharply lower than the earlier ~20% outlook.
“We’ve seen incipient stress across the board; it’s not regional,” MD Rajeev Jain told analysts. “We’ve cut business by 25%… expect recovery by March–June.”
As MSME lending slows, overall loan growth guidance is revised to 22–23%, down from 24–25%.
According to Fitch Ratings’ Siddharth Goel, smaller MSMEs are under stress due to over-leveraging, not just tariff hikes. Many borrowed from multiple NBFCs during aggressive expansion phases, making lenders vulnerable during demand slowdowns.
NBFCs have heavy exposure to high-risk small enterprises — over 26% of their loans go to the highest-risk MSMEs, compared to 18% for private banks.
At IIFL Finance, gross MSME NPAs rose to 5.93% (vs 5.42% last quarter). Its MSME book fell 3% sequentially as the company shifted toward secured lending and away from unsecured loans.
CFO Kapish Jain noted a “very cautious stance” with primary focus on recovery & collections.
Crisil warned MSME NPAs may rise cyclically, especially in export-driven sectors hit by the US 50% tariff on Indian goods — affecting textiles, leather, chemicals, gems & jewellery.
The MSME sector contributes 30% of India’s GDP and is the second-largest employer.
Ugro Capital saw 29% AUM growth to ₹12,226 crore but tightened underwriting. Gross NPA rose to 2.4%, and credit cost increased to 2.5% of AUM.
In sectors like textiles, debt has risen but revenue hasn’t, leading to indebtedness.
Shriram Finance also turned cautious despite 16% AUM growth. Gross NPA improved to 4.57% from 5.32% a year ago.
Vice-chairman Umesh Revankar said MSMEs tied to US exports (some with 60% exposure) are at higher risk.
Not all NBFCs are equally hit — Ugro Capital said less than 5% of its borrowers are export-oriented — but overall industry stress remains.
Across the board, NBFCs have shifted to a “risk-first” approach to protect asset quality.
Ugro will slow disbursals while absorbing ₹3,000 crore assets via Profectus Capital acquisition.
Shriram Finance is monitoring demand closely.
Bajaj Finance expects MSME growth to normalise by H1 FY27.
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