MSME Credit Drives Bank Loan Growth Amid Policy Support: Axis Bank Report

New Delhi, Dec 19 (KNN) Credit to micro, small and medium enterprises (MSMEs) has emerged as a key driver of bank loan expansion in recent years, according to a report by Axis Bank. 

The report noted that in FY25, MSMEs accounted for 22 percent of incremental non-food bank credit, raising their overall share in total non-food credit to 18 percent, underlining the growing importance of the segment within India’s banking system.

Policy Support and Credit Guarantees

The steady rise in MSME lending, from around 5.2 million in FY21 to over 10 million by December 2024, has been supported by government-led credit guarantee schemes, which improved lender confidence and expanded access to finance for smaller businesses. 

The cumulative amount approved under credit guarantees rose from about Rs 2.6 trillion till FY21 to nearly Rs 8.1 trillion by December 2024, indicating higher participation by MSMEs and deeper penetration of formal credit.

Role of Udyam Registration

The policy push has been complemented by efforts to increase MSME registration through the Udyam portal, bringing more enterprises into the formal system. 

Higher registration levels have improved data availability and transparency, enabling banks to better assess creditworthiness and extend loans to first-time and small borrowers.

Falling Rates and Tech-Led Lending

Another major factor supporting MSME credit growth has been the sharp fall in interest rates. The report pointed out that 10-year AA-rated bond yields are down by about 130 basis points compared to pre-Covid levels, reducing borrowing costs and encouraging MSMEs to seek formal credit.

Banks and non-banking financial companies (NBFCs) have also increasingly adopted data-driven underwriting, using alternative data such as GST returns and utility bill payments, reducing dependence on traditional collaterals.

NBFCs Gain Share

NBFCs have recorded the highest five-year CAGR of 19 percent in MSME credit, compared with 16 percent for private banks and 9 percent for public sector banks. 

While NBFCs account for only 11 percent of MSME loans outstanding, they now contribute to about one-third of loan originations below Rs 10 million.

Private banks continue to dominate MSME loans outstanding with a 43 percent share in FY25, while public sector banks have seen a gradual decline in share.

Asset Quality and Outlook

Citing the RBI’s June Financial Stability Report, the Axis Bank report noted that non-performing assets (NPAs) and stressed loans in the MSME segment moderated through FY25. 

The report added that the estimated Rs 30 trillion MSME credit gap, as highlighted by SIDBI, suggests that MSME lending, growing by around Rs 3-4 trillion annually since FY21, will remain a major contributor to overall credit expansion going forward. 

(KNN Bureau)