Small business loans pose a big problem for NBFCs

India's top non-banking financial companies (NBFCs) have flagged early signs of stress in small business loans, owing to trickling cash flows at borrowers and slackening credit demand, sparking delinquencies even in once-resilient segments.

- Anshika Kayastha & Shayan Ghosh

Industry executives said demand is slowing also because small businesses are facing delayed payments from central and state governments, and profit margins are shrinking amid a broader slowdown.

While Bajaj Finance has pointed out a sudden build-up of stress, Shriram Finance has seen challenges in some states. Bajaj Finance has a micro, small and medium enterprise (MSME) loan book of ₹52,428 crore, and reported a gross bad loan ratio of 1.76% in Q1 in the segment, up 28 basis points (bps) from the previous quarter. A basis point is one-hundredth of a percentage point.

In the analyst call post Q1 earnings, the consumer loan behemoth flagged an unexpected rise in delinquencies in the business banking and professional or self-employed borrower segments such as loans to doctors, which had not seen stress even during the pandemic period. Meanwhile, reduced state spending in Telangana, Tamil Nadu, Andhra Pradesh and Karnataka has hit small businesses—particularly in manufacturing—leading to weaker demand for small business loans.