MSME credit growth is projected to moderate in FY27 after expanding by 15-16% in FY26. Banks are prioritizing deposit collection to balance their lending books, while the government has launched the Rs 2.55 lakh crore ECLGS 5.0 scheme to support working capital. Investors should monitor how banks manage the gap between credit and deposit growth and observe potential impacts on net interest margins.
What Happened
Credit growth for Micro, Small, and Medium Enterprises (MSMEs) in India is expected to slow down in the current fiscal year (FY27). Following a period of rapid expansion that saw growth hit 15-16 percent in FY26, the pace is now forecast to moderate. A senior finance ministry official noted that maintaining such high growth is becoming difficult because the pool of existing loans has grown significantly, and banks are now shifting their focus toward collecting more deposits.
The Deposit-Credit Gap
For investors, the most important factor behind this slowdown is the balance between loans and deposits. In FY26, bank credit grew by nearly 16 percent, while deposit growth lagged at around 13.4 percent. Banks need deposits to fund their loans, and when credit outpaces deposit growth, it creates a funding gap. To bridge this, banks are now focusing more on mobilizing deposits, which naturally limits how aggressively they can expand their loan books, including those for the MSME sector.
Government Support Through ECLGS 5.0
Despite the expected moderation in overall credit, the government is trying to provide relief for businesses facing external challenges. The government has launched the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, with a corpus of Rs 2.55 lakh crore. This scheme is designed to provide collateral-free working capital loans to businesses impacted by the ongoing West Asia crisis. These loans come with a 100 percent government guarantee, capped at Rs 100 crore per business. The aim is to ensure that even as credit growth slows, viable businesses still have access to necessary working capital.
Varying Industry Perspectives
There is no consensus on exactly how much the growth will slow. Some industry leaders remain positive. For instance, the Receivables Exchange of India Ltd (RXIL) projects healthy double-digit growth for the year, driven by sectors like manufacturing, auto parts, and pharmaceuticals. They believe reforms to the Trade Receivables Discounting System (TReDS) will help improve liquidity for small businesses.
Conversely, other representatives are more cautious. Concerns have been raised about tighter lending standards, where banks are becoming more selective due to asset quality worries. Some forecasts suggest growth could drop to between 5 and 10 percent in FY27, citing global headwinds, supply chain disruptions, and resource shortages that are squeezing the profitability of smaller companies.
What Investors Should Track
Investors should look beyond the headline growth numbers and focus on the health of the lending system. First, monitor the quarterly results of banks with high exposure to the MSME segment; specifically, watch for improvements in deposit growth rates versus credit growth. If deposit growth remains slow, banks may face pressure on their net interest margins (NIMs) because they may need to offer higher interest rates to attract funds. Second, keep an eye on asset quality reports for MSME portfolios. As lending standards tighten, the industry will be watching to see if this leads to better loan quality or if smaller businesses continue to struggle with high costs and weak demand.