A time to handhold: Lenders must support MSMEs as tariff woes rise

As MSME tariff woes increase, lenders have to work closely with smaller industries, even as demand for a lifeline grows, reports Raghu Mohan

In November last year, Swaminathan J urged bankers to work collaboratively with small businesses “to build trust, enhance credit discipline, and ensure that they are equipped with the financial tools needed to succeed”.

 

The Reserve Bank of India’s (RBI’s) deputy governor was speaking at the CEO Forum of the Federation of Telangana Chambers of Commerce and Industry. The topic was ‘MSMEs — Bridging the credit gap through improving confidence in lending’.

 

That time is well upon us now. Micro, small and medium enterprises or MSMEs are coping with US’ tariff related woes, and a closer engagement between lenders and the sector has already started.

 

“The bank is watching the impact on the book closely and will take appropriate calls on any support required by MSMEs after due assessment,” says Debadatta Chand, managing director and chief executive officer (CEO), Bank of Baroda.

 

He feels the sector is quite robust, strong and resilient to wither away any adverse impact due to the tariffs. Vijay Shetty, president & head, commercial banking group, Axis Bank, points to near term headwinds for some export oriented clusters, but believes that these challenges can “be catalysts for MSMEs to diversify markets, upgrade capabilities, and strengthen competitiveness”.

These are potholes that cannot be paved over double quick. But as August 27 approaches -- the date on which the additional 25 per cent on India for Russian oil purchases kicks in — there is consensus that forbearance to hand hold MSMEs is called for.

 

But first, what about the impact of MSME stress down the line on lenders?

 

Partial absorption of the increased product prices due to higher tariffs will put pressure on MSMEs, squeeze their already slim margins and pose a material challenge to their competitiveness.

 

For the sectors that are most impacted, one can expect contraction of demand to lead to pressure on working capital and credit cycles, feels Pushan Sharma, director-Crisil Intelligence.

 

“The MSME segment has witnessed a declining NPA trajectory post pandemic, but with stress in specific pockets of unsecured MSMEs along with tariff related challenges, NPAs are expected to remain marginally higher in FY26,” says Sharma.

 

This will mark a reversal from the RBI’s Financial Stability Report (FSR) of June 2025, which noted an improvement in MSMEs gross-NPA ratio — it fell to 3.6 per cent in FY25 from 4.5 per cent in FY24.

 

One way of looking at what’s in store is via a peek into the past.

 

During Covid-19 pandemic, there was a balance-sheet clean up by lenders followed by a lending boom.

 

“What we are seeing isn’t a spike in NPAs, but a reversal to their mean,” explains Aseem Dhru, founder and CEO, SBFC Finance.

 

He feels more credit on MSMEs stretched repayment ability “is not a good idea, but temporary measures like ECLGs (Emergency Credit Line Guarantee Scheme) will be a bridge to help navigate this chasm”. Incidentally, the government’s credit guarantee schemes improved flow of credit to the MSME sector — especially vulnerable enterprises — with approximately ~6.28 trillion guaranteed under two flagship schemes, viz, the ECLGS and Credit Guarantee Fund for Micro Units.

 

On June 11, 2024 the RBI’s updated master directions on lending to MSMEs mandated a 14-day window to take credit decisions for loans up to ~25 lakh. For loans above this limit, the timelines are to be as per the board-approved sanction time norms.

 

But credit availability is now to be seen in the context of the tariff mess.

 

In the 28th round of the RBI’s Systemic Risk Survey (SRS) in May 2025, 80 per cent of the respondents thought that export dependent manufacturing sectors (eg textiles, readymade garments, electronics) and MSMEs in export clusters will face the highest risk due to global trade disruptions. Nearly 40 per cent of respondents assessed the shipping and logistics industry was the most vulnerable to trade slowdown.

The 27th Edition of the SRS (carried in the FSR: December, 2024) was not so explicit, but listed the increase in trade tariffs and impact on global trade as a key risk. If you were to read both the surveys along with the long-standing issues highlighted by Swaminathan in his speech on MSMEs — in the areas of credit discipline and capacity building — you can’t help but ask: Could the authorities not have gone in for a pre-emptive package for this segment?

 

Can more be done?

 

In the here and now, Ajay Sahai, director-general & CEO, the Federation of Indian Export Organisations (FIEO) is for a scheme akin to the ECLGS for exports.

 

“It can be a game-changer; and offer exporters collateral-free working capital, backed by government guarantees, while cushioning risk and safeguarding competitiveness in global markets,” he says.

 

Another way is to lower the premium paid on the cover provided by the Export Credit Guarantee Corporation (ECGC) to mitigate the risk of non-payment by foreign buyers.

 

“With high tariffs, buyer risk increases due to possible order cancellations, renegotiations, or defaults. Lowering the premium makes insurance more accessible to small and medium exporters,” Sahai says.

 

Plus, an automatic enhancement of credit limits up to 30 per cent. The justification: exporters need higher working capital to stay competitive, either by increasing output, improving product quality, or offering price concessions.

 

An unqualified success has been the Trade Receivables e-Discounting System (TReDS), a platform for facilitating the financing/discounting of trade receivables of MSMEs through multiple financiers. These receivables can be due from corporates and other buyers, including government departments and state-run entities. The revisions in TReDS guidelines on June 7, 2023 enabled insurance for financiers to hedge against default risk, expanded the pool of financiers, and enabled secondary market for factoring units. Reflecting these changes, the number and amount involved of invoices uploaded and financed increased sharply in FY24. The success rate of the number of invoices financed improved to 94.4 per cent in FY24 from 93.9 per cent in FY23.

 

“For exporters whose goods risk becoming uncompetitive due to tariffs, the International Trade Finance Services (ITFS) platform provides an alternative cross-border financing route. Together, TReDS and ITFS offer businesses a dual safety net to maintain cash flow and sustain growth,” says Ketan Gaikwad, MD and CEO, Receivables Exchange of India (RXIL). He is also for a leg-up to export factoring, “a crucial tool in MSMEs diversification strategy; it provides immediate cash by advancing a percentage of the invoice value, eliminating the wait for customer payments”.

 

Small can still be beautiful.   

Shift on cards 

The Financial Stability Report, June 2025, noted that asset quality of MSMEs improved with the gross-NPA ratio falling to 3.6% in FY25 from 4.5% in FY24. But that may change now  

In the 28th round of the RBI’s Systemic Risk Survey in May 2025, 80% of respondents perceived export-dependent manufacturing sectors and MSMEs in export clusters to face the highest risk 

Nearly 40 per cent of respondents assessed in the above survey said that shipping and logistics would be the most vulnerable to trade slowdown 

Federation of Indian Export Organisations wants lower premium on the cover provided by the Export Credit Guarantee Corporation. Plus, automatic enhancement of credit limits up to 30%