NBFCs flag rise in MSME delinquencies as Iran war disrupts supply chains

NBFCs see early warning signs in MSME portfolios as supply disruptions and rising input costs linked to the West Asia conflict strain cash flows and push up early-stage delinquencies

Several non-banking financial companies (NBFCs) are witnessing a rise in early-stage delinquencies in their micro, small and medium enterprises (MSME) loan portfolios, driven by supply chain disruptions and a surge in raw material costs amid the ongoing conflict in West Asia, which has now stretched beyond a month.

 

Industry executives said the trend, while noticeable, does not yet signal a sharp deterioration in asset quality but warrants close monitoring.

 

“At this stage, it is an early warning signal rather than a full-blown asset quality issue. However, if geopolitical uncertainties persist, delinquency risks could rise further,” an NBFC executive said.

 

NBFCs are tightening underwriting standards and stepping up monitoring of vulnerable accounts. Going ahead, industry participants expect credit costs to inch up and lending to become more selective, particularly for MSMEs in stress-prone sectors.

 

The early signs of stress are most visible in the 30 days past due (DPD) category, typically considered a leading indicator of asset quality pressures. “We are seeing a rise in early-stage delinquencies, particularly in the 30 DPD bucket, which signals stress building up in MSME portfolios,” said another senior NBFC executive.

 

Executives attributed the trend to supply chain disruptions and elevated input costs linked to the West Asia conflict. “Volatility in crude oil and raw material prices has significantly increased production costs, compressing margins for MSMEs,” an industry executive said, adding that in some sectors, input costs have risen 25-75 per cent.

 

Operating conditions have also been affected by disruptions across industrial clusters, including fuel shortages, labour constraints, and production slowdowns. In some pockets, these challenges have led to partial shutdowns.

 

In Tamil Nadu, nearly 30 per cent of MSMEs in certain regions have shut operations due to input shortages, according to a report by Nomura. “MSME-focused NBFCs will be among the first to be impacted. As supply chains are disrupted, vehicle fleet operators — and, in turn, vehicle financiers — will also see stress,” the report noted.

 

Cash flow mismatches are adding to repayment pressures. “Rising costs and delays in payments from larger buyers are impacting cash flows, affecting repayment capacity,” another executive said.

 

The impact is more pronounced in manufacturing segments such as auto components and engineering goods, as well as export-oriented sectors like textiles and garments, which are more exposed to global demand and logistics disruptions.