Opinion Decline in NPAs has meant that credit is more readily available for industry
MSMEs could thus benefit from a plethora of overlapping factors, capacity expansion in a benign regime when public policies are getting increasingly reoriented for their welfare
MSMEs depend greatly on large corporates through backward integration (and at times, forward integration) and hence their activity level could be a latent gauge of corporate activities. (C R Sasikumar) 
The credit growth of scheduled commercial banks, a bellwether of economic resilience, weakened to 9.5 per cent for the fortnight ended June 27 vis-à-vis last year’s growth of 17.4 per cent. Credit growth has, however, been declining since May 2024, due to a confluence of myriad reasons.
One, the RBI’s decision to increase risk weights on certain segments of consumer credit and bank lending to the NBFCs towards the end of 2023 saw loan growth in these two sectors fall sharply, ensuring a much-desired slowdown in unsecured loan growth. Unsecured credit, constituting 25 per cent of retail loans, has seen growth plummet to 7.9 per cent in March 2025 and 7.8 per cent in May 2025 from 28.3 per cent in March 2023.
Along similar lines, credit to NBFCs, making up roughly a third of services credit, declined to 5.7 per cent in March and (-) 0.3 per cent in May. The efficacy and rationale of the RBI’s directives can be gauged from the fact that even after curtailing the exuberance for a year and a half, NPAs in unsecured retail loans jumped to 1.8 per cent in March this year from 1.5 per cent the year before.
Two, the relatively low share of floating loans by private sector banks in retail loans causes friction in the transmission of low interest rates to borrowers. Private banks’ retail portfolio benchmarked to EBLR (external benchmark lending rate) is 54.7 per cent, while for public sector banks (PSBs) it is 59.8 per cent.
Three, there is a seemingly visible shift in balance from the private to public banks. PSBs showed stable growth of 12.2 per cent in 2024-25 compared to 13.6 per cent in 2023-24. However, the credit growth of private banks declined to 9.5 per cent — the lowest since 2020-21. Further, the share of PSBs in incremental credit has also increased to 56.9 per cent in FY25 from merely 20 per cent in FY18, reaping rich dividends from the government’s strategy of recognition, resolution, recapitalisation and reforms.
Banks’ gross NPA (GNPA) ratio has declined to a multi-decadal low of 2.3 per cent with the provision coverage ratio of 76.3 per cent in March 2025, as services and industry GNPAs declined significantly. The decline in industry NPAs, to 2.3 per cent in March 2025 from around 4 per cent in September 2023, is mainly due to the decline in MSME NPAs to 3.6 per cent in March 2025 from 10.8 per cent in March 2021. With a fall in NPA, credit to industry, led by MSME, has been growing steadily and its growth has outpaced those of other sectors during FY25. The share of industry credit in overall incremental credit growth has increased to 17 per cent in FY25 from 11 per cent in FY24. There is a turnaround story for MSME credit that needs to be told in detail. MSME credit, which grew by merely 5-7 per cent during 2011-2013, is now growing in double digits at around 18 per cent in May 2025.
Let us ponder over this shift.
There has been an increase in the supply of credit to existing borrowers in the MSME sector, because of an improvement in their balance sheet. Serious delinquencies — measured as 90 to 120 days past due (DPD) and reported as “substandard”, have dropped to a five-year low of 1.8 per cent. Additionally, the revised definition of MSME, with increased investment and turnover limits, will increase credit growth further.
The formalisation of MSMEs with the help of URN seeding is giving a necessary fillip to credit growth. The government has taken great initiative in providing enhanced guarantee cover to various categories of MSME borrowers, facilitating them in unblocking working capital by converting trade receivables into cash. Alongside, the turnover threshold for buyers’ mandatory onboarding on the TReDS platform has been reduced from Rs 500 crore to Rs 250 crore. The MSME Samadhaan portal is also being reimagined for cash flow efficiency.
MSMEs could thus benefit from a plethora of overlapping factors, capacity expansion in a benign regime when public policies are getting increasingly reoriented for their welfare. MSMEs depend greatly on large corporates through backward integration (and at times, forward integration) and hence their activity level could be a latent gauge of corporate activities. Promoting technological excellence tailored according to their requirements at optimal costs, mitigating information asymmetry and ironing out supply-chain issues could prove to be the tipping point at the next stage.
We are also witnessing diversification and broadening of credit markets in India. Private credit markets are making rapid inroads with flexibly structured deals as global biggies join hands. Hence, the evolving trajectories of India’s burgeoning credit markets would necessitate a pivot in regulatory attention sooner than later (In the US, lawmakers are asking for stress testing, as also questioning exuberant rating rationales.) Further, corporates are increasingly tapping off-bank channels such as commercial papers, ECBs and capital markets instruments to optimise their borrowing mix.
Lastly, India Inc has significantly deleveraged its balance sheet, while increasing cash holdings. In the last two fiscals (FY24 and FY25), the cash and bank balance of corporates has jumped by around 18-19 per cent. Major sectors reporting increased cash holdings include IT, automobiles, refineries, power, and pharma. The cash and bank balances of India Inc, excluding BFSI, is estimated at around Rs 13.5 lakh crore in FY25, indicating cash accruals are a potential vector in funding capex plans.
So, what does the future hold? We believe that going forward, the sources of credit origination through bank deposits (primarily household savings in bank deposits) need to be keenly watched. The financialisation of household savings has gained significant momentum (the share of equities in household savings has increased from 2.5 percent in FY20 to 5.1 percent in FY24; China is at 9 percent) and this will have crucial implications for banking sector credit growth.
The writer is member, 16th Finance Commission and group chief economic advisor, State Bank of India. Views are personal
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