CRISIL Ratings, in its report, has said that loans to the micro, small, and medium enterprise (MSME) segment - accounting for around 19% of bank credit as of March 2026 - are expected to face relatively higher pressure compared with other portfolios. This is due to the ongoing West Asia conflict and the seasoning of loans extended during a phase of high growth. The report added that government measures are likely to help contain stress on MSMEs and, in turn, limit the cascading impact on bank’s non-performing assets (NPAs).

The potential introduction of additional support measures - such as a credit guarantee scheme for affected sectors, similar to those implemented during periods of exogenous stress like the COVID-19 pandemic - is likely to support banks’ asset quality. Subha Sri Narayanan, Director at CRISIL Ratings, said ‘Our base case indicates a modest increase in reported gross NPAs in the MSME segment to 3.4-3.6% this fiscal, from 3.2% last fiscal. MSMEs typically have limited financial capacity to absorb higher input costs, supply chain disruptions, and working capital elongation resulting from the ongoing West Asia conflict.’

The report noted that NPAs in the MSME segment had been declining sequentially, driven by banks’ improved underwriting and monitoring capabilities. This improvement was supported by increasing formalisation and greater data availability in the sector, healthier bank balance sheets that enabled higher write-offs, and various government and regulatory support measures for MSMEs. It further added that the corporate loan segment is likely to maintain stable gross NPAs of 1.2-1.3% by March 2027, despite several sectors facing pressure on revenues and operating profits due to the gas supply shock, crude oil-linked price increases, direct trade exposure, and rupee depreciation.