Home » Blog » MSMEs Deliver Lower NPAs and Higher Growth Than Big Companies

India’s Micro, Small, and Medium Enterprises (MSME) sector has become the driving force of economic growth and employment creation, contributing as much as 30% to GDP and employing more than 110 million workers. The health of this sector is thus a key policy priority. MSMEs in the past few years have seen an outstanding improvement in their credit picture, especially in the category of Non-Performing Assets (NPAs). Concurrently, large corporate lending has taken a different path, characterized by greater risk and more complex recovery issues.

This dichotomy is now further accentuated by the Indian government’s contemplation of expanding the NPA category duration for MSME loans from 90 days to 180 days. Coupled with prior reforms like collateral-free lending, credit guarantees, and digital credit infrastructure, this initiative indicates a firm resolve to alleviate financial stress on MSMEs and maintain their status as growth drivers.

MSME NPAs: A Story of Remarkable Improvement

The most striking development in the MSME financing space has been the sharp decline in NPAs. Between FY 2019-20 and FY 2024-25, gross NPAs in the MSME sector fell by nearly 67%. Specifically, NPAs dropped from around 11% in FY20 to only 3.6% in FY25.

This improvement can be attributed to a mix of policy interventions and behavioural changes among borrowers:

• Emergency Credit Line Guarantee Scheme (ECLGS): Launched during the pandemic, this scheme provided liquidity to stressed MSMEs, preventing defaults and keeping businesses afloat.
• Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): By covering default risk for banks, this scheme encouraged collateral-free lending.
• Digital lending reforms: Technology-driven credit assessment tools reduced information asymmetry and enabled better underwriting of MSME loans.
• Financial literacy efforts: Improved awareness among MSME borrowers has led to more disciplined repayment behaviour.

The outcome is clear: MSMEs are no longer seen as “risky borrowers” but as a segment with improving asset quality and strong government backing.

Credit Growth: MSMEs Outpace Large Enterprises

Alongside better asset quality, MSME credit has expanded at an impressive pace. Lending to MSMEs has grown by more than 210% over the past decade, far outpacing credit growth to large enterprises.

Key enablers include:

• Simplified loan applications and digital platforms that cut down turnaround time for disbursals.
• Collateral-free lending that reduces entry barriers for first-time borrowers.
• Interest rate subsidies that lower the effective cost of capital.
• Priority sector lending norms that mandate banks to allocate a fixed share of credit to MSMEs.

This expansion is not just quantitative but qualitative. MSME lending today is more inclusive, reaching a wider pool of small businesses in semi-urban and rural areas, thereby supporting balanced economic growth.

Large Corporates: NPA Declines but Risks Remain

While MSME NPAs have improved, it is important to recognize the parallel trend among large companies. Public sector banks, which once struggled with a mountain of bad loans, have managed to reduce their overall gross NPAs from 9.11% in March 2021 to 2.58% in March 2025.

This recovery, however, is rooted in different dynamics:

• Insolvency and Bankruptcy Code (IBC): The introduction of time-bound insolvency resolution has pressured large defaulters to settle.
• Debt Recovery Tribunals (DRTs): Strengthened recovery mechanisms have aided banks in pursuing big-ticket defaults.
• Stringent monitoring: Large loans are subject to tighter scrutiny and collateral requirements.

Yet the fundamental risks in large corporate lending remain significant. Large loans are often concentrated, complex, and tied to global business cycles. When defaults occur, they are larger in scale, leading to systemic risks and prolonged recovery battles.

Policy Perspective: Differentiated Credit Strategy

From a policy consulting standpoint, India’s credit ecosystem shows two distinct narratives:

1. MSME lending is becoming safer, supported by guarantees, subsidies, and government schemes. It is aligned with employment generation, innovation, and regional economic development.
2. Large corporate lending remains riskier despite reforms, due to the sheer size and complexity of defaults.

This calls for a differentiated credit strategy:

• Aggressive credit expansion to MSMEs through policy-backed schemes.
• Cautious and risk-controlled lending to large corporates with stronger monitoring frameworks.

Such a strategy not only safeguards financial stability but also channels capital toward segments with higher socio-economic returns.

The 180-Day NPA Classification Proposal: A Timely Relief

The government’s recent proposal to extend the NPA classification period for MSME loans from 90 days to 180 days deserves special attention. This move, if approved by the Cabinet, could have three major benefits:

1. Short-term relief from external shocks: MSMEs facing disruptions due to steep US tariffs and global trade tensions would get more breathing space to regularize repayments.
2. Reduced premature stress recognition: Many small businesses face temporary liquidity mismatches. Extending the window prevents viable firms from being prematurely branded as defaulters.
3. Reinforcement of supportive policy stance: It complements earlier reforms and strengthens the narrative that MSMEs are central to India’s growth story.

From a consulting lens, this measure reflects a balance between prudential banking norms and the need for flexibility in times of economic stress.

Broader Economic Implications

Why does the MSME lending story matter so much? Because the sector drives inclusive growth and employment. A stronger MSME credit ecosystem has multiplier effects:

• Job creation: MSMEs are labour-intensive and vital to employment generation in semi-urban and rural India.
• Export growth: MSMEs contribute nearly 45% to India’s exports, making them critical for foreign exchange earnings.
• Innovation and entrepreneurship: Easier credit access fuels small business innovation, fostering a vibrant entrepreneurial ecosystem.

By contrast, overexposure to large corporate lending often creates concentration risk in the banking system, as seen during India’s earlier corporate debt crisis.

Consulting Insights: Way Forward

Based on current trends, the following recommendations can be considered for policymakers, financial institutions, and industry stakeholders:

1. Deepen credit penetration for MSMEs: Leverage fintech partnerships and digital lending platforms to reach underserved micro and small enterprises.
2. Strengthen risk-based pricing: Encourage banks to use advanced analytics for differentiated risk pricing, rewarding disciplined MSME borrowers with lower rates.
3. Build long-term credit culture: Expand financial literacy programs to ensure MSME borrowers continue to adopt sound financial practices.
4. Balance prudence with flexibility: Implement the 180-day NPA classification carefully, with safeguards to prevent misuse while still supporting genuine borrowers.
5. Mitigate large corporate risk: Maintain strict monitoring of big-ticket loans, enhance early warning systems, and ensure timely action under IBC and DRT frameworks.

Conclusion

India’s MSME segment has proved that with the necessary policy support, disciplined borrowers, and digital credit reform, even long-vulnerable segments can have robust credit health. The steep decline in NPAs from 11% to 3.6% in five years is proof of this turnaround.

The current policy initiative, including the suggestion to extend the classification under NPA to 180 days, will further deepen the sector’s resilience in the face of a turbulent international environment. Concurrently, vigilance is needed on large corporate lending, where risks continue to be high notwithstanding improvements.

In a consulting context, the case is obvious: India’s financial system must focus on MSME lending as the safer, more effective, and more equitable source of growth and continue to have tight controls on large corporate exposures.