Credit Landscape Shifts As MSMEs, PSU Banks Lead; Private Channels Gain Toehold

India’s banking sector credit growth has slowed to its lowest in three years, but the headline figure masks significant changes in the composition and character of lending. A new analysis by SBI Research points to a transforming credit landscape, where public sector banks are regaining market share, MSMEs are enjoying an unprecedented credit surge, and private credit markets are expanding rapidly, offering new avenues of funding for India Inc.

Overall credit growth for scheduled commercial banks moderated to 9.6% as of mid-June 2025, well below last year’s 19.1%. Even after adjusting for the HDFC merger, growth is only 10.6%, reflecting a clear cooling of momentum in traditional bank lending. Yet this average conceals marked divergences between sectors, bank types and funding sources.

One striking development is the resurgence of public sector banks. While private banks’ credit growth slowed to 9.5% in 2024–25, their weakest since 2021, State-owned banks maintained a robust 12.2% expansion. This shift has pushed State-owned banks’ share of incremental credit to 56.9% in 2024–25, a dramatic increase from just 20% in 2018. 

The turnaround in state-owned banks’ fortunes has been credited to the government’s multi-year 4R strategy: recognition of bad loans, resolution through mechanisms like IBC, recapitalisation, and wider reforms. The result has been a sharp improvement in asset quality, with banking sector gross NPAs falling to a record low of 2.6% in the first half of 2024–25, compared with over 11% in 2018.

While the overall pace of credit growth has slowed, one clear outlier is the MSME sector, which has seen year-on-year credit growth of 17.8%, nearly double the headline rate. This so-called “silent credit revolution” for MSMEs reflects a series of targeted policy and regulatory interventions.

Government credit guarantee schemes have been expanded significantly: the CGTMSE cover has been doubled from ₹50 million to ₹100 million, new guarantee schemes have been launched for manufacturing MSMEs, startups, and exporters, with limits reaching up to ₹200 million for term loans.

The formalisation of MSMEs is also accelerating credit flow. The use of Udyam Registration Numbers has simplified access to credit and guarantees, with over 27 million registrations completed so far. Delinquencies have declined, with sub-standard asset ratios among MSME borrowers falling to a five-year low of 1.8%. 

Changes to the definition of MSMEs, such as raising the turnover threshold for medium enterprises to ₹5 billion, have further expanded the eligible borrower base. Additionally, reforms such as halving the mandatory onboarding threshold on the Trade Receivables Discounting System (TReDS) from ₹5 billion to ₹2.5 billion are expected to boost working capital access for smaller firms.

Internal Accruals
This broadening of the credit base is happening in a context where India Inc is also diversifying its sources of funding. The report highlights the growing role of private credit markets, which have begun to challenge traditional bank lending as a major source of corporate finance.

In 2023–24 alone, private credit deals totalled around ₹774 billion, growing 7% over the previous year. Domestic fund houses accounted for over 60% of these transactions, with sectors such as real estate, consumer durables and financial services seeing the most interest.

Alternative funding channels are also thriving. Borrowing through commercial paper rose by over 14% to ₹15.7 trillion in 2024–25, while external commercial borrowings remain a significant source of capital expansion. Equity markets too have performed robustly, with money raised from IPOs, FPOs, QIPs and other instruments more than doubling from ₹1.9 trillion in 2023–24 to ₹3.71 trillion in 2024–25. This abundance of market-based funding is reducing corporate dependence on bank credit and even enabling early debt repayments.

Another factor weighing on credit demand is India Inc’s strong internal cash generation. Cash and bank balances held by non-financial corporates have grown nearly 18–19% over two years, reaching an estimated ₹13.5 trillion in 2024–25. 

Many companies, especially in sectors like IT, automobiles, refineries and power, are funding capex from retained earnings rather than borrowing, buoyed by healthy balance sheets and sustained operating margins.

Despite these shifts, the outlook for credit growth remains stable. Working capital demand has partially cushioned the slowdown in term loans, with such loans growing by around 17% in March 2025 compared with 10% a year earlier. 

SBI Research expects that the Reserve Bank of India’s recent policy actions, including a 100-basis-point repo rate cut and a reduction in the cash reserve ratio, will ease funding costs and support credit flows through the rest of the year.

As the composition of credit evolves, the challenge for policymakers will be to ensure that regulation keeps pace with the changing contours of India’s financial system. With private credit, alternative instruments and formalised MSMEs playing ever greater roles, India’s credit market is becoming deeper, broader and more diverse — a trend that, if managed well, could support more balanced and resilient growth in the years ahead.