Micro, small and medium enterprise (MSME) credit growth is expected to moderate further in FY27 after expanding around 15-16 percent in FY26, as a larger lending base makes it difficult to sustain the rapid pace of lending seen in recent years, a senior finance ministry official said. Banks will be focusing on deposit mobilisation which would temper the credit growth, the source added.

“Banks are increasingly focused on deposit mobilisation. Credit growth ultimately has to be supported by deposit growth, and that will naturally influence the pace of expansion,” While bank credit grew 15.9 percent in FY26, deposit growth lagged at around 13.4 percent, highlighting the funding gap that lenders have been trying to bridge.

“MSME credit growth was around 15-16 percent last year. Some moderation is expected because very high growth rates cannot continue indefinitely, especially when the base itself has become much larger,” the official added.

MSME credit growth has remained robust in recent years, accelerating from 12.39 percent in FY23 to 20.58 percent in FY24 as businesses stepped up borrowing after the pandemic and government-backed credit guarantee schemes improved access to finance. Credit growth moderated to 14.1 percent in FY25 and was at 15-16 percent in FY26.

The moderation is not limited to MSME lending, with overall bank credit growth also expected to ease this year after strong expansion across corporate and retail loans in FY26.

“Overall credit growth is also likely to moderate somewhat. Last year, most segments, including corporate and retail credit, witnessed strong expansion. Going forward, growth may normalise, but that should not be interpreted as weakness,” the official said.

The expected moderation comes even as the government has rolled out the Rs 2.55 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, which provides government-backed guarantees for additional working capital loans to eligible businesses affected by the West Asia crisis.

ECLGS was first introduced in May 2020 to help businesses affected by the COVID-19 pandemic by enabling banks to extend collateral-free emergency credit backed by a sovereign guarantee. Over the first four versions of the scheme, the government issued nearly 1.2 crore guarantees amounting to about Rs 3.68 lakh crore, of which MSMEs accounted for more than 1.13 crore guarantees worth around Rs 2.43 lakh crore, according to SBI Ecowrap.

The latest ECLGS 5.0 marks the first revival of the scheme after the pandemic, targeting an additional Rs 2.55 lakh crore of credit to businesses facing liquidity pressures arising from the West Asia conflict. Eligible MSMEs can avail additional working capital loans backed by a 100 percent government guarantee of up to 20 percent of their peak working capital utilisation during the January-March 2026 quarter, subject to a cap of Rs 100 crore, under the scheme notified by the government through the National Credit Guarantee Trustee Company (NCGTC).

Govt support for MSMEs

Industry executives, however, said policy measures announced in the Union Budget 2026 and recent schemes are expected to support formal credit flows to MSMEs over the medium term.

Ketan Gaikwad, Managing Director and Chief Executive Officer of Receivables Exchange of India Ltd (RXIL), said Budget 2026 measures, including mandatory onboarding of central public sector enterprises on the Trade Receivables Discounting System (TReDS) – an electronic platform that enables MSMEs to receive early payment against invoices – and reforms to strengthen invoice financing are expected to improve liquidity and access to formal credit for small businesses.

He added that the recently notified RBI TReDS Directions, 2026, which simplify MSME onboarding and provide greater operational clarity, are expected to boost financier confidence and improve access to working capital.

“We expect MSME credit to maintain healthy double-digit growth in FY27. Manufacturing, engineering, auto ancillaries, pharmaceuticals, infrastructure, logistics and export-oriented industries are likely to continue driving credit demand,” Gaikwad said.

Banks more selective

Industry representatives said the moderation in credit growth is being driven by a combination of tighter lending standards and challenging business conditions rather than weak demand alone.

Ravi Sood, President, Badli Industrial Estate Association, that he expects MSME credit growth of 12-14 percent in FY27, with demand for both working capital and term loans remaining healthy.

“The moderation is more likely to stem from the supply side. Banks have become more selective in lending because of concerns over asset quality in certain MSME segments, tighter risk assessment practices and continued pressure on mobilising deposits,” Sood said.

He added that delayed payments from large corporates also continue to strain the working capital position of smaller businesses.

“For an MSME, the cheapest source of working capital is not a bank loan – it is the timely payment of its legitimate dues,” he said.

Global headwinds weighing

Anil Bhardwaj, Secretary General of the Federation of Indian Micro and Small & Medium Enterprises (FISME) , “The dip in credit growth is likely due to the Gulf war, disruptions in supply chain and shortage of diesel and PNG.”

He said he expects MSME credit growth to moderate to 5-10 percent in FY27.

Former FISME President Sandeep K. Jain said higher costs and weaker demand are squeezing MSME profitability.

“SMEs are struggling with increased costs and reduced margins. Customers are yet to increase purchase order prices because they themselves are facing weaker sales and higher costs.