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The impact of the West Asia conflict, essentially on the MSME segment and the portfolio quality thereof, has been widely discussed. In this backdrop, the recent datasets from CRIFHighmark indicate following trends: a) growth momentum has softened across various segments (within MSME) and across most lending cohorts (PSU banks, private banks and NBFCs), b) while early delinquency trends seem to have risen recently (in April 2026 versus March 2026), the rising trend is not materially different from previous years. Small loans (exposure of sub-INR 20mn) warrant a closer watch and c) within banks, early delinquency has risen for PSU banks, while private banks continue to maintain lower delinquency rates.

While recent data points indicate manageable impact and the current guarantee-backed schemes will likely play pivotal role in assuaging concerns around liquidity support, uncertainty persists and needs monitoring. Juxtaposing fundamentals with valuations, we believe large private banks offer the best risk-reward. That said, given overall uncertainty, they seem to lag near-term positive catalysts and thus, offer good earnings compounding in the near term

Growth has softened:

As per CrifHighmark (Commercial Bureau data), the MSME portfolio reached INR 46tn (up 12.8% YoY) with active loans at 19.2mn (up 2.4% YoY). However, the momentum seems to have slowed down in the recent months. Just to elucidate, the portfolio grew 3.1% in Dec ’25 to April ’26 versus 9.7% same time last year. Moreover, active loans dropped 3.5% between Dec ’25 and April ’26, versus 3% growth in the same period last year. Within segments, the drop was sharper in the micro segment (sub-INR 20mn ticket size). In terms of industry, shipping & transport, food processing, and auto & ancillaries were the subsectors that saw the sharpest declines. From a lender’s perspective, activity moderated across segments with softer traction on NBFCs and PSU bank.

Asset quality seems to be holding up:

Portfolio trends have been holding up better than our expectations yet. Across segments, even early delinquency trends have been holding up – while there is some rise between March ’26 and April ’26, the rise is smaller or in-line with the prior year across most borrower segments. Similarly, within lenders, while Par 31-90dpd has risen in PSU banks it remains steady for NBFCs and private banks. Within the product segments, cash credit has seen some rise, while term loans have been steady. For leverage, 82% (by active loans) have only one loan, while contributing only 30% of the portfolio outstanding. In terms of delinquency trends, CRIFHighmark data observes that trends remain better among multi-loan borrowers. While, recent data points do indicate manageable impact and the recent guarantee-backed schemes will likely play a pivotal role in assuaging concerns, the uncertainty persists and requires monitoring.

We continue to prefer larger private banks:

Despite the challenges/uncertainties, trends are resilient for MSMEs. That said, prolonged crisis in West Asia will likely pose certain dislocations via elevated costs, logistics pressures and tighter working capital cycles, which continue to be the key monitorables for us. Navigating through these challenges will cause uncertainties, which are difficult to pencil in yet. Having said that, juxtaposing fundamentals with valuations, we believe large private banks offer the best risk-reward. Even as, large private banks seem to lag near-term positive catalysts, they offer good earnings compounding in the near term. Within mid-private banks, the valuation (premium) versus larger private banks has risen sharply. Thus, we would rather be selective in our approach. Within PSU banks, we prefer State Bank of India and Bank of Baroda.

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