NBFCs go easy on MSMEs as bad loans begin to bite

Top NBFCs turn cautious as weakness in MSME sector reflects in repayments

- Subhana Shaikh

Non-bank lenders are turning cautious on lending to small enterprises, as defaults rise following a lending spree to borrowers with weak credit profiles.

Bajaj Finance, IIFL Finance, Shriram Finance and Ugro Capital are among lenders that have slowed the growth of collateral-free lending to micro, small and medium enterprises (MSME) in the September quarter. A clear shift is emerging: more secured loans, closer scrutiny of borrowers, and more cash to cover potential loan losses.

Bajaj Finance has scaled back the MSME business after gross bad loan ratio in the segment hit 2.47% in the September quarter, against 1.83% the preceding quarter and 1.65% a year earlier. India's largest non-bank finance company (NBFC) now expects its MSME book to grow only 11-12% in fiscal year 2026 (FY26), sharply down from its earlier projection of nearly 20%.

"We've seen incipient stress across the board; it's not regional in nature," managing director Rajeev Jain told analysts on 10 November. "We've cut business by 25% and expect the worst to be behind us by March and June, after which we can be back in growth mode.”

As the MSME portfolio slows, Bajaj Finance expects its overall loan growth for the financial year at 22-23%, down from its earlier expectation of 24-25%.

“MSMEs, particularly the smaller ones, have clearly come under pressure in recent quarters. The stress is not so much linked to the tariff hike; exporters were most affected by that, and NBFC exposure there is limited. The bigger issue is over-leveraging,” Siddharth Goel, director at Fitch Ratings, said.