India’s MSME lending market is entering a new phase of competitive intensity, with banks slashing rates to woo and retain clients in the Rs 5–30 crore ticket size range. “To retain clients, particularly in the MSMEs space, banks are lending at rates as low as 8.5%,” said a senior official with the state-run bank, adding that days of charging 10% and above are now history, as the system flushed with liquidity. He stated that the rate war has been pronounced, particularly in the agriculture and food processing sectors, among others.
Liquidity surge and shifting focus power rate war
The shift is being driven by borrower mobility, regulatory tailwinds, and a liquidity surge that’s set to intensify following the Reserve Bank of India’s (RBI) phased CRR cut beginning September 6, 2025. The RBI’s 100 basis points (bps) CRR reduction from 4% to 3% will be implemented in four tranches through November, releasing an estimated Rs 2.5 lakh crore into the banking system, allowing banks fresh lending capacity and amplifying the competitive push in MSME credit.
Karthik Srinivasan, Senior Vice-President and Group Head – Financial Sector Ratings at ICRA, attributes the trend to slowing corporate credit and the retail segment, especially in unsecured lending.
In June 2025, the bank credit growth declined to 10.4%, compared to 13.8% during the same period last year. On the contrary, the MSME credit jumped to 17% from 11% in the same period the previous year. “Across banks, we are seeing sharp growth in the MSME/business banking segments that primarily cater to the small ticket loan segment. So, it’s natural that increasing competition is leading to finer pricing,” said Srinivasan.
Agreeing with him, KVS Manian, MD & CEO at Federal Bank, added, “In the MSME sector, there will always be someone offering cheaper loans, but our strategy is to deepen relationships by cross-selling products and increasing customer stickiness. We remain focused on risk-adjusted returns when it comes to pricing decisions. At the same time, competition is sharper in the upper segment, our approach is holistic, balancing rates with service and relationship depth, thus making it harder for customers to walk away.”
Banks turn to data, digital tools to win MSME trust
With corporate loans slowing, the retail, agri, and MSME (RAM) segment has been the clear focus for banks, particularly for public sector banks (PSBs). Barring State Bank of India, which will declare its first quarter results on August 8, the other 11 listed PSBs, on average, reported a 15% year-on-year (YoY) basis jump in RAM advances for the June-ended Q1FY26, while a rise of 2.3% on a quarter-on-quarter (QoQ) basis. In the same period, the MSME segment reported a growth of 11% YoY and 5.4% QoQ growth in advances. On a QoQ basis, the MSME share within overall RAM advances has improved by 80 bps from 25.7% in March 2025 to 26.5% in June 2025.
“We have remained steadfast in our commitment to retailise the book, and the continued momentum in MSME lending, growing at over 13% YoY is a reflection of our sharpened focus on cash management, relationship-led engagement, and digital enablement,” said Debdutta Chand, MD & CEO, Bank of Baroda (BOB) in a post first quarter result media call. For BOB, the MSME advances grew by 13.1% YoY as against 9.8% last year. “We are focusing on retail deposits and advances. As of today, RAM portfolio accounts for about 58% of the domestic loan book, and the bank aims to increase this share to 65% in the next three years, driven by faster growth in retail and MSME lending,” he added.
Public sector banks (PSBs), buoyed by policy transmission and refinances support, have emerged as aggressive lenders in MSME clusters. With the RBI eliminating foreclosure charges on floating-rate loans up to Rs 7.5 crore, MSMEs are switching lenders more freely, often migrating from private banks to public sector banks. In response, private banks are offering finer rates to existing clients, deploying risk-based pricing, and bundling working capital solutions to retain business.
Bankers also see a structural shift in the way banks are catering to MSME lending. “With GST and digital data repositories now in play, the visibility into these businesses has improved significantly. As a result, risk perception has reduced. Cleaner books have followed, allowing for more competitive pricing, but within a structured and risk-aware framework,” says a senior official with a private lender who feels banks will need to go beyond rates, differentiating through digital enablement, underwriting agility, and sector-specific strategies to stay relevant in a rapidly evolving MSME ecosystem.
He added that private banks, in particular, have made substantial progress in moving towards cashflow-based and analytics-driven underwriting. “Collateral now acts more as a comfort factor than the core decision-making input. The real shift is in how data is being used, not just for credit decisions, but also for monitoring and engagement,” he adds further stating that clients are likely to prefer banks offering faster turnaround time, sharper risk assessment, and a more nuanced understanding of business health beyond just collateral, that will gradually deepen credit access for SMEs that were previously underserved.
While the shift is underway, the rate war is unlikely to be short-lived. With liquidity expected to remain in surplus mode through the end of 2025, pricing will remain a key lever for client retention, states Srinivasan. He cautioned, “It will be difficult to gauge how long this rate war will continue. With growth potential being there, lenders will also need to monitor it carefully, as an increase in slippages can occur if not managed well.” While MSMEs are gaining bargaining power, banks must balance growth with asset quality, as competition intensifies, margin compression and credit risk could rise.