MSME Credit Supply Declines by 11% in Q4 FY25 Amid Lending Caution: SIDBI-CIBIL Report

Mumbai | May 23, 2025 – The latest MSME Pulse report, jointly issued by SIDBI and TransUnion CIBIL, highlights a notable contraction in credit supply to micro, small, and medium enterprises (MSMEs) during the final quarter of the fiscal year 2025. This reduction comes in the face of heightened concerns about asset quality and economic uncertainties, prompting lenders to adopt a more cautious approach.

Demand Remains Strong Despite Reduced Credit Availability

While credit disbursement declined by 11% year-on-year in Q4 FY25, the volume of loan enquiries rose by an equivalent margin, reflecting sustained demand for financing among MSMEs. This divergence points to the cautious stance lenders have taken amid growing apprehensions about credit risks.

The report explains, “The 11 per cent decrease in commercial credit supply compared to the previous year is likely a consequence of increased credit risk concerns among lenders, influenced by external economic pressures.”

Nevertheless, for the full fiscal year, commercial lending to MSMEs still recorded a modest growth of 3%.

Credit Portfolio Expands with Improving Asset Quality

India’s MSME credit outstanding grew 13% year-on-year, reaching ₹35.2 lakh crore by March 31, 2025. Importantly, asset quality has shown meaningful improvement, with the delinquency rate for loans overdue between 90 and 720 days falling to 1.79%, a five-year low.

This 35 basis point improvement over the previous year reflects strengthened risk assessment and more disciplined underwriting practices within the sector.

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New-to-Credit Borrowers Drive Credit Demand

A significant portion of the increased demand originated from new-to-credit (NTC) borrowers, who constituted 47% of total loan originations in the final quarter. Public sector banks accounted for 60% of these new loans.

Among these new borrowers, the trade sector demonstrated particularly strong demand, while the manufacturing sector experienced the highest year-on-year growth in new-to-credit participation.

Regional and Sectoral Insights

The MSME credit landscape continues to be dominated by five states Maharashtra, Gujarat, Tamil Nadu, Uttar Pradesh, and Delhi which together represent 48% of all credit originations by value.

• In Maharashtra, Gujarat, Tamil Nadu, and Delhi, the manufacturing sector remains the largest recipient of credit.
• Uttar Pradesh’s lending activity is led by the trade sector, reflecting the prominence of small-scale trading in the region.

Looking Forward: Enhancing MSME Credit Access

Bhavesh Jain, Managing Director and CEO of TransUnion CIBIL, emphasised the need for improving formal credit access and providing financial guidance tailored to MSMEs to support sustainable and inclusive growth.

The report recommends that lenders enhance their underwriting processes by adopting a holistic view of borrowers, integrating both personal and business credit profiles to better assess creditworthiness and expand access, particularly for new-to-credit enterprises.

It concludes, “Engaging closely with MSMEs, understanding their challenges, and committing to their success are essential steps toward broadening credit availability.”

This report presents a nuanced view of the MSME credit environment recognising both its resilience and the caution that lenders must exercise amid external uncertainties. With strategic focus and collaboration, there is reason to be cautiously optimistic about the sector’s future.