Non-performing assets in the micro, small and medium enterprise sector could inch higher in the near term, Crisil Ratings said, as global trade softens and recent loan books mature. The warning focuses on export-oriented firms and comes as lenders and businesses gauge demand into the year-end.
The Core Warning
“Non-performing assets (NPAs) in the Micro, Small and Medium Enterprises (MSME) sector may see a marginal uptick, particularly in select export-oriented industries, amid global trade headwinds and portfolio seasoning,” according to Crisil Ratings.
The note points to two drivers. One is weaker international orders. The other is “portfolio seasoning,” where newer loans begin to show stress as they age. The expected shift is described as marginal, but it is timely for banks, non-bank lenders, and small firms that rely on steady cash flow.
What Is Driving The Pressure
External demand has cooled in several major markets. Higher interest rates and cautious consumers have trimmed orders, especially for discretionary goods. That can strain working capital for small exporters who face payment delays.
Seasoning effects can also lift reported stress. Loans made during periods of higher credit growth often reveal true repayment behavior after the first few quarters. As these cohorts season, slippages can tick up from low bases.
Industries Most Exposed
Crisil’s caution centers on export-oriented pockets, where order visibility and margins are sensitive to currency moves and shipping costs. Sectors frequently tied to export cycles include:
- Textiles and apparel
- Gems and jewelry
- Engineering goods and auto components
- Leather and footwear
- Seafood and agricultural products
These categories often run on thin margins and tight payment terms. A small delay in collections can push accounts into arrears, especially for firms with limited cash buffers.
Implications For Lenders And Firms
For lenders, even a slight rise in NPAs can mean higher provisions and closer monitoring of export books. Banks may step up early warning checks, review borrower cash flows, and seek additional collateral in some cases.
For MSMEs, the signal is to focus on liquidity. Shorter receivable cycles, hedging for currency risk, and diversifying buyers can help. Firms with concentrated exposure to one market or product line face the most risk if demand weakens further.
Background And Recent Trends
MSMEs play a large role in employment and manufacturing. Their credit access improved in recent years as lenders expanded outreach and digital underwriting. During stronger trade cycles, defaults stayed contained. As the cycle cools, pressure can rise from a low base.
Past slowdowns show a common pattern. Exporters first adjust production and inventory. If orders do not recover, cash flow tightens and loan repayments slip. The degree of stress depends on how quickly demand returns and whether buyers honor payment timelines.
Managing Risk And The Road Ahead
Lenders are likely to use targeted steps rather than broad pullbacks. These steps can include tighter invoice checks, supply-chain financing that links to verified shipments, and structured repayment plans for seasonal businesses.
For policymakers, the key issues are credit flow and employment. If stress spreads, working capital lines and timely payment mechanisms can limit spillovers to jobs and suppliers.
What To Watch
Three markers will show whether the uptick stays marginal:
- Export order books and new inquiries in the next two quarters
- Days sales outstanding for small exporters
- Early delinquency buckets in recent loan vintages
If global demand steadies and collections improve, the impact may remain mild. If orders weaken further, more accounts could slip into stress.
The message is clear: export-focused MSMEs and their lenders should prepare for mild strain as loan books age and trade remains soft. Close monitoring, disciplined cash management, and diversified demand can keep the rise in NPAs contained.
