India’s public sector banks (PSBs) have been seeing a steady improvement in their MSME loan book – or loans given to Micro, Small, and Medium Enterprises – although credit extended to the smallest of these businesses has not witnessed a reduction in stress at the same rate, data shared by the finance ministry with the Parliament on Tuesday showed.
Responding to a written question in the Rajya Sabha, Minister of State for Finance Pankaj Chaudhary said that the gross non-performing asset (NPA) ratio of PSBs’ MSME loans had declined to 6.18 per cent as at the end of 2024-25 from 7.99 per cent a year ago and 12.8 per cent at the end of March 2022.
The fall in the gross NPA ratio was due to both, an increase in the loans extended to MSMEs as well as a fall in the absolute amount of bad loans. The gross NPA ratio is calculated by dividing the quantum of loans gone bad – loans that are not being paid back – by the total amount of loans outstanding. For instance, loans given by state-owned banks to MSMEs stood at Rs 13.07 lakh crore as on March 31, up 11.3 per cent year-on-year. At the same time, the value of these loans that had become non-performing – or were not being repaid – was down 14 per cent from a year ago at Rs 80,749 crore.
While the absolute amount of PSBs’ bad loans within the MSME sector is down 22 per cent compared to March 2023, the decline has primarily been driven by small and medium enterprises. As on March 31, bad loans to small enterprises stood at Rs 19,677 crore, down 28 per cent year-on-year and 39 per cent from March 2023. For medium-sized enterprises, PSBs’ bad loans stood at Rs 8,553 crore as at the end of the last financial year, down 30 per cent year-on-year and 46 per cent compared to two years ago.
However, the decline in NPAs for micro enterprises has been considerably smaller. This is a worry as the quantum of bad loans among micro enterprises is much higher. As per the data, PSBs’ bad loans to micro enterprises stood at Rs 52,519 crore as at the end of 2024-25, down 3 per cent year-on-year and 7 per cent compared to March 2023.
“…the incidence of NPAs in lending by banks, inter alia in the MSME sector, is attributable to a number of factors, which include overall performance of the borrowing entity, macroeconomic conditions, sectoral issues, global business environment, etc,” Chaudhary said in his response on Tuesday.
Lending to micro enterprises has been a problem for the entire industry, but particularly for state-owned banks. The Reserve Bank of India (RBI) last month said in its most recent Financial Stability Report that credit to these micro enterprises, which formed 49 per cent of total MSME credit, saw weaker incremental growth in 2024-25 compared to small and medium businesses.
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“In terms of amount outstanding, the share of sub-prime borrowers in the MSME portfolio of the SCBs (scheduled commercial banks) has decreased from 33.5 per cent in June 2022 to 23.3 per cent in March 2025. PSBs, however, had a higher share of sub-prime borrowers in their MSME portfolio compared to PVBs (private banks) and NBFCs (non-banking financial companies),” the RBI had said.
A sub-prime borrower is one who is viewed as a risk due to a non-existent or poor track-record of paying back loans.
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