India’s MSME sector, a cornerstone of the nation’s economy, has witnessed a significant improvement in asset quality over recent years. The gross NPA ratio declined from 8.7% in March 2021 to 3.6% in March 2025, reflecting the positive impact of policy support, regulatory interventions, and economic recovery post-pandemic.
However, Crisil Ratings forecasts a slight reversal in this trend. By March 2026, NPAs are expected to inch up to between 3.7% and 3.9%, primarily due to pressures in select export-oriented sectors and the natural aging of loan portfolios.
Global Trade Challenges Impacting MSMEs
The global trade environment has become increasingly challenging for Indian exporters. In August 2025, India’s exports to the United States fell for the third consecutive month, marking a 16.3% decline from July. This downturn was exacerbated by the U.S. doubling duties on Indian goods from 25% to 50% on August 27, following an earlier increase from 10% to 25% on August 7.
These tariff hikes have significantly impacted sectors such as textiles, engineering goods, and chemicals, leading to reduced order volumes and delayed payments. Consequently, MSMEs in these export-oriented industries are facing liquidity constraints, which may contribute to a slight rise in NPAs.
MSME Sector’s Financial Health
Despite the anticipated uptick in NPAs, the overall financial health of the MSME sector remains robust. As of March 2024, funded advances outstanding to MSMEs stood at approximately ₹28.04 lakh crore, with gross NPAs at ₹1.25 lakh crore, resulting in a gross NPA ratio of about 4%.
Provisional data for FY 2025 up to December 31 also indicate a decline in both gross NPAs and the NPA ratio for MSMEs, underscoring the sector’s resilience.
Government Measures to Mitigate Risks
The Indian government has implemented several measures to reduce NPAs in the MSME sector. These include the introduction of the Emergency Credit Line Guarantee Scheme (ECLGS), which has provided liquidity support to MSMEs during the pandemic, and the implementation of the National Credit Guarantee Trustee Company (NCGTC) framework to enhance credit flow.
Additionally, regulatory interventions by the Reserve Bank of India (RBI), such as the restructuring of stressed assets and the provision of moratoriums, have offered temporary relief to MSMEs, allowing them to navigate financial challenges more effectively.
Outlook
While the slight increase in NPAs is a concern, it is essential to view it within the broader context of the MSME sector’s recovery trajectory. The sector’s adaptability, coupled with ongoing government support and policy interventions, positions it to withstand global trade headwinds. Continuous monitoring and targeted measures will be crucial to sustain this momentum and address emerging challenges proactively.