New Delhi [India], June 20 (ANI): India's micro, small and medium enterprises (MSME) loan segment is showing early signs of stress, with delinquency levels inching up in April 2026 even as banks remain cautious about the potential impact of supply-chain disruptions and rising input costs linked to the West Asia conflict, according to a sector update report by 360 ONE Capital.

The report noted that while the impact of the conflict has not yet materially reflected in banks' asset quality, lenders are increasingly concerned about the second-order effects on MSME borrowers.

'The recent commentaries by the banks (during 4Q) and our channel checks indicate that though the impact of the West Asia crisis is not yet visible on the asset quality, the banks remain cautious on the second order impact on the MSME borrowers,' the report said.

According to the report, the conflict has disrupted supply chains and increased input costs, which could affect the repayment capacity of MSMEs operating in sectors such as fertilisers, ceramics, polyester textiles, specialty chemicals, flexible packaging, auto components, diamond polishing and basmati rice exports.

The report highlighted that data from CRIF High Mark points to an initial deterioration in repayment trends. 'Loans to MSME segment (by banks, NBFCs and others) witnessed early signs of stress in April 2026, with PAR 31-90/PAR 90+ inching up to 1.8%/7.8% versus 1.6%/7.6% in 4QFY26,' it said.

The report also found that stress was more visible in public sector banks than private lenders. 'PAR 31-90 for PSBs increased to 3% in April 2026 versus 2.7% in 4QFY26, while PAR 31-90 for PVBs remained stable at 0.7%,' it said.

360 ONE Capital said public sector banks could face a relatively higher impact if stress in the MSME segment intensifies.

'Historically, PSBs has had higher slippage/GNPA ratio within the MSME segment as compared to PVBs and thus we believe, the disruptions due to the geopolitical situation is likely to have a higher impact on asset quality for PSBs as compared to PVBs,' the report said.

The report also pointed to moderation in credit growth as lenders turn more cautious. MSME loan growth slowed to 12.7 per cent year-on-year in April 2026 from around 18-20 per cent seen during the second and third quarters of FY26.

'Growth within the active loans slowed down to 2.5% YoY versus 6% YoY/9.4% YoY in 2QFY26/3QFY26, reflecting the cautious approach by lenders in terms of new disbursals or due to the Middle East war,' the report said.

Despite the emerging stress, the brokerage believes government-backed guarantee schemes such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the Emergency Credit Line Guarantee Scheme (ECLGS) are likely to cushion the impact on the banking system.

'CGTMSE and ECLGS are likely to cushion the impact,' the report added. (ANI)