The recent GST rate cut has triggered a fresh wave of credit demand from India's micro, small and medium enterprises (MSMEs), with banks witnessing a sharp rise in enquiries for expansion-linked funding. According to industry executives, the GST rejig has not only improved profitability for MSMEs but also encouraged them to scale operations, prompting lenders to accelerate their MSME-focused initiatives.
State-owned Indian Overseas Bank (IOB) reported that its MSME portfolio touched Rs 48,000 crore as of September 30, 2025, against a full-year target of Rs 51,000 crore-marking a 16.7% year-on-year growth. The bank expects to surpass its revised goal of Rs 55,000 crore in MSME lending by the end of FY26.IOB's MD & CEO said the government's streamlined MSME classification and turnover-based criteria have strengthened MSME credit flow, adding that the GST restructuring will be a key driver. "We are focusing on the manufacturing segment within MSMEs," he noted.
The country's largest lender, State Bank of India (SBI), is tapping the high-growth opportunity through digital MSME loans, which offer end-to-end sanction within 45 minutes. SBI has already processed 2.3 lakh accounts amounting to Rs 74,434 crore in credit limits up to August 2025, reflecting rising demand for quick, hassle-free funding.
Indian Bank is also witnessing strong credit momentum. The bank's MD & CEO said MSME loan growth has jumped from 5-6% earlier to around 17% in FY26. "Demand is mainly coming from services-especially hospitality for expansion and new hotel projects before and after GST 2.0. Ancillary units are also driving significant credit demand. We are confident of exceeding our MSME target this year," he said.
Public sector lender Punjab National Bank (PNB) has rolled out new offerings to capture the surge in MSME demand, including comprehensive financing up to Rs 100 crore, paperless digital loans up to Rs 25 lakh, and a fully digital MSME loan of up to Rs 5 crore backed by the CGTMSE guarantee and concessional interest rates.
Bankers say the increased push toward MSME loans is also influenced by the shift to the expected credit loss (ECL) framework, which has made MSME lending comparatively less capital-intensive for banks.
With GST 2.0 bringing renewed confidence and digital lending channels scaling rapidly, the MSME credit cycle is set for strong growth through FY26, signalling a broader revival in India's small business economy.
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