NBFCs tighten MSME lending as bad loans rise: Report

Siddharth Goel, director at Fitch Ratings, told Mint that smaller MSMEs are under notable pressure due to over-leveraging. Many such firms borrowed simultaneously from several NBFCs during an aggressive credit expansion cycle. When demand softened, the comparatively weaker liquidity and capital positions of NBFCs made them more vulnerable, Goel said.

Citing industry data, Mint reported that as of March-end, over 26% of NBFC loans were extended to small businesses in the highest-risk category, compared with 18% for private-sector banks. This leaves NBFCs more exposed when small enterprises face cash-flow stress.

At IIFL Finance, gross MSME NPAs increased to 5.93% in Q2 from 5.42% a quarter earlier and 3.10% a year ago, Mint reported. Its MSME loan book remained largely unchanged year-on-year at ₹13,474 crore but fell 3% sequentially. The company attributed this to a strategic shift toward secured lending and a pullback from unsecured loans. CFO Kapish Jain told analysts on 31 October that the lender remains "very cautious" on MSMEs and microfinance, with a sharp focus on recovery and collections, Mint noted.

Crisil has also flagged emerging risks. In an October report cited by Mint, the rating agency warned of a potential cyclical uptick in MSME NPAs, particularly among export-linked borrowers affected by the steep 50% US tariff on Indian goods. The duties have strained cash flows in sectors such as leather, textiles, chemicals, and gems and jewellery-key MSME clusters.

The MSME segment contributes over 30% of India's GDP and is the country's second-largest source of employment after agriculture, according to Mint.

Ugro Capital, which predominantly targets MSME borrowers, saw its assets under management grow 29% year-on-year to Rs 12,226 crore. However, this was accompanied by tougher underwriting and moderated disbursals. Founder and managing director Shachindra Nath described the approach as prudent given the macro challenges in small-ticket MSME credit, Mint reported. Ugro's gross NPA stood at 2.4% in September, up from 2.1% a year earlier, and its Q2 credit cost was 2.5% of average AUM, reflecting higher provisioning.

Shriram Finance also signalled caution in its MSME book. Its AUM rose 16% year-on-year to ₹2.81 trillion, while gross NPA declined to 4.57% from 5.32% a year earlier. The company remains watchful of export-linked MSMEs, especially those with heavy reliance on the US market, vice-chairman Umesh Revankar told analysts on 31 October, as reported by Mint.

While not all lenders are equally affected-Ugro Capital told analysts that fewer than 5% of its borrowers are export-dependent-the broader NBFC sector is facing tariff-related stress and softer global demand, Mint noted.

Across the industry, lenders are adopting a risk-first posture to safeguard asset quality. Ugro plans to moderate disbursals even as it prepares to absorb Rs 3,000 crore in assets via its proposed Profectus Capital acquisition. Shriram Finance is monitoring demand patterns closely, with Revankar saying any diplomatic resolution could ease tariff pressures but that the company is not assuming such an outcome. Bajaj Finance, meanwhile, remains confident of returning to stronger MSME growth by the first half of FY27, Mint reported.