Domestic rating agency ICRA has recently raised concerns about the risks linked to loans given to small and medium enterprises (SMEs). The agency flagged that lenders’ exposure to small businesses, especially loans under Rs 25 lakh to proprietorships, is showing signs of stress. This signals a potential risk area for banks and non-banking lenders.
Stress in SME Loan Portfolios
ICRA noted a rising trend of stress in SME portfolios. Loan losses for small business loans, including both secured and unsecured types, have increased to 3.4% in March 2025 from 3% a year ago. The increase suggests that more small enterprises might be struggling to repay loans, potentially impacting lender profitability and making credit risk management critical for financial institutions.
Anil Gupta, Senior Vice President at ICRA, highlighted this growing risk, particularly in the segment of loans below Rs 25 lakh extended to proprietorship companies. The agency believes careful monitoring and risk assessment will be crucial going forward.
Credit Growth and Banking Sector Outlook
Despite these risks, ICRA has maintained a “stable” outlook for the banking sector for the fiscal year 2025-26. The agency has kept the credit growth forecast at 10.5% for FY26, reflecting moderate growth expectations amid ongoing economic challenges. The non-banking finance companies (NBFCs) are expected to show asset growth of 15-17%.
The agency pointed out key factors to watch, including consumption trends, the impact of US tariffs on trade, job market conditions, and asset quality challenges for lenders.
Fixed Deposit Rates Have Bottomed Out
For savers, ICRA noted that the fixed deposit (FD) interest rates offered by banks have likely bottomed out. This means further significant cuts in FD rates are unlikely as long as the Reserve Bank of India maintains the current policy rates. This brings some relief for fixed-income investors who rely on FD interest for stable returns.
What This Means for Small Businesses and Investors
Small business owners should be aware of the tougher lending environment. There is a greater need to maintain healthy financials and timely loan repayments. Meanwhile, investors relying on FD returns can expect rates to remain steady, barring any major changes from the RBI.
Overall, ICRA’s report points to a cautious but stable outlook for India’s banking sector, with particular attention needed on SME loan exposure and the fixed deposit market.
