Delinquencies are beginning to increase in the unsecured business loans and micro-LAP, said analysts.
“Factoring in the rising asset quality noise and some growth fatigue after supernormal growth over the past few years, we had trimmed growth estimates for select banks with higher reliance on MSME/SBL (Small business loans) lending or exposure to US exporters recently by 50-100 bps,” Emkay Global said.
The recent US tariff actions have already started to disrupt the order and payment flows, and margins for textile, gems and jewellery, engineering, and food processing units, which contribute nearly 5.5% of bank credit and could thus pose some risk to banks, the report said.
US tariff shock threatens MSME credit flow
Analysts believe that large and mid-size corporates operating in these sectors are better positioned to manage such disruptions, though MSMEs could be vulnerable.
Emkay said that within their coverage Karur Vysya Bank, City Union Bank, Union Bank of India, YES Bank, IndusInd Bank, ICICI Bank, and Indian Bank appear more exposed to these sectors or US exports or have a higher dependence on MSMEs for growth.
MSME lending has been the primary credit or margin driver in recent years, which cushioned the slowdown in corporate and unsecured retail loans. However, cracks are beginning to surface after a prolonged benign asset-quality cycle.
Rising Delinquencies in small-ticket loans sound alarm
Among lenders, public sector banks and non-bank financial companies have relatively larger market share in the unsecured business loan space, though public sector banks dominate in the ticket size of above Rs 25 lakhs, and NBFCs in the lower ticket size bucket of less than Rs 10 lakhs.
According to data compiled by CRIF High Mark and Emkay Global, the lower ticket size in the micro- LAP segment warrant caution. The 90 days past due delinquent rate for loans of ticket size between Rs 5-10 lakhs, inched up to 4.6% in FY25 from 4.3% in FY24 and for ticket size of less than Rs 5 lakhs increased to 6.9% in FY25 from 5.9% in FY24.
These products largely cater to the new-to-credit or vulnerable borrower segments, where repayment capacity is closely linked to cash-flow cycles and is highly sensitive to external shocks, the report said.
The improvement rate of new delinquencies in the microfinance segment has become less pronounced in July and August, which indicates a potential plateau or a “status quo” compared to the sharper reductions seen before June 2025, Motilal Oswal said in a report.
“Although the sector is on a recovery path, the rebound remains uneven across players and states,” Motilal Oswal said.