MSME NPAs Seen Rising to 3.9% by FY26 as US Tariffs Weigh on Export Sectors: Crisil Ratings

Mumbai, October 7, 2025: The gross NPAs of micro, small, and medium enterprises (MSME) loan book are expected to increase to about 3.9% by the end of FY26, says Crisil Ratings. This is primarily due to new 50% tariffs being levied by the United States on Indian exports, which are set to stress some export-oriented MSME segments.

MSME Stress Expected to Edge Higher

The MSME portfolio, accounting for nearly 17% of the total banking system loans, recorded a gross NPA figure of 3.59% as of FY25 end. This is expected to increase to 3.7-3.9% during FY26, according to Crisil, largely due to the dampening effect of the US tariff hike on sub-sectors such as textiles, garments, carpets, gems and jewelry, shrimp and processed seafood products, and certain chemical products.

“For the current year, we anticipate NPAs in the MSME segment increasing moderately to 3.7-3.9 per cent. That’s primarily due to the recent, abrupt hikes in tariffs by the US,” Subha Sri Narayanan, Director, Crisil Ratings, observed.

Export-Linked MSMEs Under Pressure

The rating agency further noted that export-oriented MSMEs may be strained by increased tariffs, potentially leading to a moderate increase in total banking sector NPAs. It expects system-level dud assets to reach 2.3–2.5% by end-FY25, compared to 2.3% seen in the last fiscal.

Crisil also added that despite the acceleration of MSME loan growth being essential for growth, high growth during previous years also led to asset quality concerns for years ahead.

Retail and Corporate Loan Quality Remains Steady

In the retail sector, gross NPAs were 1.8% as of March 31, 2025, compared to 1.5% a year ago. The modest rise was mainly aided by aggressive write-offs, as during the year, banks wrote off almost 50% of their net opening NPA and slippages.

“Even if reported gross NPA stays contained through write-offs, implication of prolonged higher slippages will emerge for credit cost,” said Vani Ojasvi, Associate Director, Crisil Ratings.

The lender also forecasts total retail NPLs to remain steady at about 1.2%, buoyed by its portfolio of home loans performing well. In contrast, the corporate loan segment, which accounts for about 38% of banking credit, is likely to maintain NPAs of about 1.4% to 1.5%, assisted by healthy balance sheets and cautious credit approaches.

Outlook

Crisil pointed out that the Indian banking industry is strong, but export-oriented MSMEs remain a key risk sector today due to external trade headwinds. The agency emphasized that banks must maintain tight risk assessment and monitoring, particularly across sectors affected by tariffs, as credit growth remains at its current pace.

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