New Delhi: Lending by public sector banks (PSBs) has played a key role in nearly doubling the share of loans extended to micro, small and medium enterprises (MSMEs during January to October 2025, according to a report released by Crisil Intelligence.
The report noted that the share of incremental bank credit flowing to MSMEs rose sharply to 32.5 per cent in the year ended October 2025, compared with 17.7 per cent in the corresponding period last year. The proportion of MSME loans in total outstanding bank credit also increased by 1.74 percentage points during the period.
Public Sector Banks Drive MSME Lending
Crisil attributed the significant jump in MSME credit largely to higher disbursements by public sector banks. It pointed out that PSBs have primarily focused on safer, secured lending, while the overall increase in MSME credit was also supported by changes in the definition of MSMEs.
Despite the growth, the report flagged early signs of stress in small-ticket, unsecured MSME loans. “There were some signs of stress in small-ticket size unsecured business loans,” the report said, though it added that the overall asset quality of MSME portfolios remains “satisfactory”.
The findings are broadly in line with the Reserve Bank of India’s Financial Stability Report, which highlighted that PSBs continue to have meaningful exposure to subprime MSME borrowers.
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Sectoral and External Exposure Risks
The Crisil report also highlighted that around 12.6 per cent of overall bank credit is exposed to potential risks arising from US tariffs. Of this, over 43 per cent of the exposure comes from the textiles sector alone, indicating concentrated vulnerability within specific industries.
Growth in Secured Retail Credit
Alongside MSMEs, the share of secured retail credit in incremental lending also increased during the period. Secured retail loans accounted for 31.3 per cent of incremental credit, up from 24.5 per cent a year earlier.
Housing loans formed nearly half of incremental retail credit, while gold loans contributed more than one-third, reflecting borrower preference for collateral-backed borrowing amid a cautious credit environment.
Decline in Unsecured Retail Loans
In line with regulatory expectations, the share of unsecured retail personal loans in incremental credit declined to 9.7 per cent in October 2025 from 11 per cent in October 2024. Growth in unsecured retail loans slowed to 9.8 per cent year-on-year, compared with 11.7 per cent a year earlier.
Crisil attributed this slowdown to concerns over borrower overleveraging and the impact of the Reserve Bank of India’s increased risk weights on unsecured retail loans.
Rising Rural Credit, Weak Industrial Demand
The report also pointed to an improvement in rural and semi-urban credit demand. The combined share of incremental credit in these regions rose to 26.3 per cent as of September 2025, up from 23.7 per cent a year earlier. In contrast, the share of metropolitan areas declined to 51.6 per cent from 56.2 per cent.
Meanwhile, sluggish private capital expenditure continued to weigh on bank lending to large industries. High-ticket industrial loans contracted during the period, reflecting muted investment activity by the private sector.
Overall, the Crisil report suggests a gradual shift in bank lending towards MSMEs and secured retail segments, even as lenders remain cautious about unsecured exposures and large industrial credit amid evolving economic and regulatory conditions.
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