India's MSMEs Show Resilience Amid Credit Caution: Report While India's broader economic trajectory remains stable with GDP growth averaging over 7 per cent annually (excluding the pandemic period) and projected to hit 6.6 per cent in FY26, the MSME sector's path is more nuanced.

India's micro, small, and medium enterprises (MSMEs) are showing signs of steady recovery and cautious optimism, as per a press release and the MSME Sampark Report by UGRO Capital and Dun & Bradstreet. While 64 per cent of MSMEs have resumed operations post-pandemic, and more than half report over 10 per cent year-on-year (YoY) growth, investment momentum remains subdued, underscoring both the progress and persistent headwinds in the sector.

Drawing from an analysis of over 45,000 MSMEs across seven industries between 2021 and 2024, the semi-annual report presents a mixed picture. MSMEs are navigating a tightrope between growth potential and economic uncertainty. Investment growth among Udyam-registered MSMEs has slowed significantly, from 61 per cent in FY22 to just 23 per cent in FY24. The report attributes this moderation partly to high capital costs expected to persist into Q1 of 2025 and to heightened caution around long-term planning.

"MSME Sampark has gone beyond just a report and is slowly becoming a movement that brings together industry leaders, policymakers and financial institutions to collaboratively shape the future of MSME financing," said Shachindra Nath, founder and managing director of UGRO Capital. "We see moderation in total loan disbursement in recent quarters, a trend reflecting more conservative lending practices across the industry... it also presents an opportunity for NBFCs to play a more strategic role in bridging the credit gap."

Despite tighter credit flows, the report notes a positive trend in formalisation. Businesses are moving away from cash-heavy models, with improving debt-to-turnover ratios and a decline in overall risk. This shift is especially visible in mature firms with turnovers exceeding INR 20 crore. These businesses are demonstrating stronger financial discipline and transparency, which could pave the way for easier access to institutional credit in the long term.

Still, micro enterprises, especially those seeking smaller loans, are struggling to secure funding. Of the 15,000+ micro businesses surveyed, many continue to file loan inquiries, but actual disbursements remain weak. Lenders are displaying a marked preference for asset-backed financing like gold loans, avoiding the riskier cash-flow-based models. This signals a wider shift in credit strategies, as institutions hedge against potential volatility.

Dr. Arun Singh, global chief economist at Dun & Bradstreet, pointed out improvements in the credit profile of MSMEs, noting a decline in gross non-performing assets (GNPAs). "The overall GNPAs touched a 12-year low in September 2024, with GNPA of large borrowers at 2.4 per cent and of MSMEs at 2.2 per cent, respectively, compared to 12.8 per cent and 11 per cent during early 2020," he said. However, Singh also flagged rising caution among businesses, as their outlook on capital expenditure has dimmed.

The report identifies clear sectoral trends. Light engineering, electrical equipment, food processing, and chemicals accounted for the highest borrowing activity in 2024. Interestingly, B2C enterprises reduced their debt exposure compared to B2B businesses, with the exception of the auto components and hospitality sectors.

Additionally, small businesses remain notably more optimistic than medium and large firms, especially as concerns over global trade and protectionism weigh down export sentiment. Sales and export projections have cooled amid geopolitical uncertainty, and many businesses are leaning toward localized supply chains to reduce dependency on international suppliers.

While India's broader economic trajectory remains stable—with GDP growth averaging over 7 per cent annually (excluding the pandemic period) and projected to hit 6.6 per cent in FY26—the MSME sector's path is more nuanced.