MSME loan growth decelerates to 13% amid global headwinds; ECLGS 5.0 slated to cushion impact: Report

Global uncertainty is weighing on micro, small and medium enterprises (MSMEs), causing loan growth to fall to 13 % YoY in April 2026 from 20 % in December 2025, IIFL Capital notes. The Emergency Credit Line Guarantee Scheme (ECLGS) should mitigate this, given that earlier versions boosted credit activity, fund use and cut NPAs.

To counter the fallout from the West Asia conflict, the government rolled out ECLGS 5.0 in May 2026. The scheme offers a full 100 % guarantee on loans to regular MSMEs, limiting exposure to ₹1 billion per borrower. IIFL Capital estimates it will spur an extra ₹2.55 trillion of credit—about 5 % of the current MSME loan book—with ₹350 billion already approved by end‑May.

“ECLGS 5.0 should soften the blow, since prior rounds lifted credit activity, fund utilisation and cut both NPAs and forward‑flow rates,” the IIFL Capital report notes.

The drag is sharper in manufacturing, trade and PSU lending, the latter having shed three points of market share over two years. Overall loan growth is easing: value‑based growth is now 3 % YoY and volume‑based growth –3.5 % YoY, down from 10 % and 3 % a year earlier.

Asset quality shows a slight worsening, with the PAR30+ metric up 40 bps month‑on‑month in April 2026, likely a seasonal tick. Pressure is mounting most on micro and small borrowers, PSU lenders, cash‑credit and term‑loan books, and on manufacturing and services sectors.

Larger borrowers, however, show resilience. Though just 17 % of MSME clients generate 70 % of total loans, they enjoy lower—and improving—delinquency versus single‑loan borrowers, whose risk is edging up. Lenders are also tilting toward safer names, with the very low‑risk segment’s share climbing four points in two years.

Published on June 12, 2026