MSME loan growth decelerates to 13% amid global headwinds; ECLGS 5.0 slated to cushion impact: Report
New Delhi, June 12
Global uncertainty has started to drag micro, small, and medium enterprise activities, with loan growth decelerating to 13 per cent year-on-year in April 2026 compared to 20 per cent in December 2025, according to a report by IIFL Capital. However, the Emergency Credit Line Guarantee Scheme is expected to cushion the impact, as past schemes had improved credit activity, fund utilisation, and lowered non-performing assets.
To tide over the challenges arising from the West Asia conflict, the government announced ECLGS 5.0 in May 2026. This latest iteration provides a 100 per cent credit guarantee coverage for loans extended to standard MSMEs, with the total quantum capped at Rs 1 billion per borrower.
The report expects this intervention to drive an additional credit flow of Rs 2.55 trillion, which represents approximately 5 per cent of outstanding MSME loans, with Rs 350 billion already sanctioned until the end of May.
"We believe ECLGS 5.0 should cushion the potential impact as the earlier schemes had improved (1) the credit activity, (2) fund utilisation, and (3) lowered NPA and forward flow rates," the IIFL Capital report stated.
The slowdown is more pronounced for manufacturing and trading activities, and for public sector undertakings (PSUs), which also lost three percentage points in market share over the last two years. The overall growth momentum is softening, with loan growth by value and volume slowing down to 3 per cent and negative 3.5 per cent, respectively, in the current calendar year-to-date, compared to 10 per cent and 3 per cent during the corresponding period last year.
On the asset quality front, the report mentioned that there is a marginal deterioration, with the "PAR30+ metric rising 40 basis points month-on-month in April 2026," though the shift appears largely seasonal for now.
Stress has increased relatively more for micro and small borrowers, PSU lenders, cash credit and term loan products, alongside manufacturing and service industries.
On the other hand, the report data revealed a structural resilience among larger contributors. While only 17 per cent of borrowers contribute 70 per cent of total MSME loans, their delinquency is not only lower compared to single-loan borrowers, but also improving against the marginal deterioration observed in the single-loan segment.
Simultaneously, lenders have been shifting towards higher quality borrowers, with the share of the very low-risk borrower segment rising by four percentage points over the last two years.
— ANI
Reader Comments
Finally, the government is listening! ECLGS 5.0 with 100% guarantee is a game-changer for honest MSMEs. My father's textile unit in Surat survived thanks to earlier schemes. The report mentioning improved fund utilisation gives me hope. But please, banks should not add hidden fees this time. 🙏
The report says only 17% of borrowers contribute 70% of loans. That's the real story here—the big players are fine, but micro and small guys are struggling. PAR30+ rising 40 bps is a red flag. PSU lenders need to be more proactive, not just shift to "very low-risk" borrowers. What about the small shopkeeper who needs working capital? 😤
It's good that the government is proactive, but I wish they'd address the root cause—global uncertainty and West Asia conflict impact on raw material prices. MSMEs are the backbone of our economy. The Rs 2.55 trillion additional credit flow sounds great on paper, but the real test is disbursement speed. Let's see if it matches the earlier ECLGS success.
Interesting data from IIFL Capital. The structural resilience among larger borrowers is encouraging—those top 17% seem well-managed. The shift towards very low-risk borrowers (up 4% over two years) shows lenders are getting smarter, but it also means riskier but potentially innovative MSMEs might get left out. A balanced approach is needed.
I work with MSMEs in Kanpur
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