Credit Flows Into MSMEs, But Several Unable To Make Timely Repayment Due To Tariff War

Credit flow to MSMEs has expanded, but the exporting businesses and units are not yet out of the woods. The Centre is now looking at measures to support these units.

Credit To MSMEs

Latest Reserve Bank of India (RBI) data reveal that in the first half of the current financial year, credit growth to the critical MSME sector clocked a growth of over 12 per cent compared to a mere 4 per cent in the corresponding period. A continuous double-digit credit growth over the last six months has helped in unlocking the acute liquidity crisis that had hit the MSMEs.

But then, where is the problem?

Repeated cases of delayed payments from overseas buyers have become a cause for concern for these MSMEs.

Banks, which maintain stringent regulatory norms pertaining to non-performing assets (NPAs), with a mandate to raise an early warning alarm on any delayed payment of interest or principal amount, are keeping a close watch on export-driven MSMEs.

A red flag is raised in case of a delay of 30 days, after which an account is treated as a special mention account (SMA).

In case of non-payment for 90 days, the account is treated as a non-performing one.

This strict norm has hurt the MSME sector.  

The problem has aggravated for MSMEs due to rising cases of delayed payments from overseas buyers. The MSMEs have sought an extension of the SMA time frame. Until the SMA time frame is extended for MSMEs from the current 90 days, thousands may officially turn into NPA.

“Once the MSMEs are categorised as SMA, they would not only find it difficult to service the existing loans, but getting further credit from banks would also become impossible,” Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small and Medium Enterprises (FISME), told The Secretariat.  

“MSMEs have a greater chance of getting categorised as SMA, and once that happens, normal banking operations for those businesses become difficult. This is creating false alarms and needs to be addressed,” Bhardwaj said.

For example, the textiles and apparel sector has been severely hit. A large number of businesses in Tiruppur, Ludhiana, Surat, and the National Capital Region -- Gurugram-Faridabad- Noida-Ghaziabad, are struggling for survival as huge sums of money remain stuck in payment delays.

MSMEs Face Stress Amid Rising NPAs

Raising the interest subvention limit to support the MSMEs is also on the anvil.

A recent report by the FISME noted that several MSMEs have reported a drop in sales despite the overall increase in exports. The report noted that a large number of MSMEs have been reporting stress due to a sales drop, lower realisation, and stuck inventory.

Tariff Effect

Crisil Ratings has projected a rise in MSME non-performing assets. NPAs of MSMEs could increase up to 3.9 per cent by the financial year end from the current 3.5 per cent due to the US tariff hike.

Of the total bank credit, the MSME loan book accounts for about 17 per cent.

While the Prime Minister’s Office (PMO), along with other ministries, is closely monitoring the situation, until the NPA norms are relaxed for the MSMEs, the challenges will persist, analysts pointed out.  A host of measures is expected to be announced. The Union Budget 2026-27 will also outline measures for the MSME sector.

The country has close to six crore MSMEs, which employ more than 25 crore people.

Official data show that the total number of exporting MSMEs in 2024-25 increased by more than 1.73 lakhs in 2024 25. These MSMEs accounted for 45.8 per cent of total exports last year.

India, with its aim at fuelling the “Made in India” label, needs to support its MSMEs.

The China MSME story

The MSMEs have played a vital role in boosting China’s economy and employment.

Globally, MSMEs remain a powerful vehicle of the economy, providing large-scale employment. These account for 90 per cent of businesses, making up for 50 per cent of GDP worldwide.  

In China, MSMEs account for more than 98.5 per cent of all businesses in contributing about 60 per cent of the GDP. 

In India, well-carved-out policy measures are the need of the day to support the MSMEs.