India’s banking and financial services sector is tightening lending norms for micro, small and medium enterprises (MSMEs) as early signs of stress begin to emerge. Amid rising delinquencies, especially in smaller loans, both banks and non-banking financial companies (NBFCs) are revamping their credit assessment strategies to safeguard asset quality.
The shift comes at a time when MSME credit has grown significantly. According to the Reserve Bank of India’s (RBI) June 2025 Financial Stability Report, MSME credit rose 14.1% year-on-year in FY25, accounting for a record 17.7% share of total bank credit. However, increasing defaults in select geographies and loan categories are prompting lenders to recalibrate.
Smarter Credit Models Backed by Data
To mitigate risk, lenders are now deploying advanced, data-backed underwriting models. These leverage alternative datasets including:
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GST filings
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Utility bill payments
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Cash flow and transaction histories
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Digital footprints and behavioural patterns
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Supply chain records
Multiple unsecured loans are also flagged during risk assessments, especially in the microfinance and informal enterprise segments.
Kotak Mahindra Bank, for instance, has ramped up its distribution footprint in rural areas, viewing them as key growth markets over the next five to seven years. “We’re leveraging data analytics to improve credit decisions and risk management,” said Manish Kothari, Group President & Head – Commercial Banking.
Adjusting to Market Realities
NBFCs and smaller lenders are also refining their loan structures based on real-time insights. Credifin, a digital lender, recently extended the tenure of its e-rickshaw loans to 36 months after observing repayment stress in over-saturated areas.
“We observed income compression in certain geographies, which required longer loan durations for better repayment alignment,” said Shalya Gupta, MD & CEO of Credifin.
Meanwhile, DBS Bank India has waived off prepayment and foreclosure charges for MSMEs, giving them flexibility to repay early and reinvest funds into expansion or technology upgrades.
Also read: Haryana MSMEs Create 15 Lakh Jobs, Says CM Saini
Regulatory Changes on the Horizon
The Reserve Bank of India is currently in talks to revise the frequency of credit bureau data updates, shifting from the current fortnightly model to daily reporting. This move is expected to give lenders more timely insights into borrowers’ credit activity and allow faster responses to emerging risk profiles.
In the microfinance segment, cautious lending is being applied especially toward new-to-credit customers and highly leveraged borrowers. Institutions are placing greater emphasis on on-time collection as a key metric, and many are diversifying their portfolios to include gold loans, MSME credit, and unsecured business loans to better manage risk.
A Sector at an Inflection Point
Despite these tightening measures, MSMEs continue to remain a critical driver of credit demand. Industry experts believe this recalibration is not a pullback, but a move toward smarter and more responsible lending practices.
The overall message is clear: while India’s MSME sector remains strong and credit-hungry, lenders are now focused on balancing access with caution, ensuring that the ecosystem can scale sustainably without compromising on financial stability.