Indian banks are expected to remain relatively resilient amid rising global uncertainties, though they could face pressure on margins and liquidity if external risks persist, according to Fitch Ratings. The report stated that Indian lenders are entering the current phase from a position of strength, with improved asset quality and stronger standalone credit profiles. However, higher energy prices, tighter liquidity conditions and weakening external demand could gradually weigh on profitability and borrower repayment capacity over time. Fitch noted that Indian banks appear better placed than many regional peers to absorb a moderate deterioration in operating conditions, with strong domestic funding and sovereign backing likely to support overall credit stability.
Despite relative resilience, Fitch estimates that continued global risks could compress sector margins by 20-30 basis points by FY27 and reduce operating profits by around 30-40 basis points. The banking system's liquidity surplus has already declined to about 0.5% of deposits, indicating tighter funding conditions. Measures to support the rupee could further constrain liquidity, though currency volatility is not expected to have a significant direct impact on banks. Even so, strong domestic funding and sovereign backing are likely to support overall credit stability, with sufficient earnings buffers helping absorb potential stress.
As reported by EY, the second-order pressure could unfold in margin compression, deferred investments, and stretched working-capital cycles. Third-order stress will transmit via ecosystem payment strain and selective employment shocks, driving heightened cash-flow volatility across MSME and retail segments, with asset-quality risks emerging with a lag. According to Fitch, asset-quality pressure would first emerge in more vulnerable segments such as retail, micro-enterprises and small and medium enterprises (SMEs), particularly in economies exposed to trade disruptions and commodity price volatility, including India, the Philippines and Thailand. Sectors with high energy intensity—such as refining, chemicals and manufacturing—are also more exposed to rising costs, while SMEs remain more vulnerable than larger corporates in an economic slowdown.
The disruptions are already pushing up fertiliser prices, tightening supply chains and raising freight costs, with implications for sectors ranging from manufacturing to healthcare. As reported by Fitch, higher energy prices, supply-chain disruptions and weaker remittance flows are likely to weigh more heavily on emerging-market banking systems, where borrower resilience is relatively lower. The stress is particularly acute for smaller firms, with early signs of pressure already visible. Goenka said there are indications of job losses among gig economy workers and in sectors such as restaurants, as smaller companies struggle to cope with margin pressures. He emphasized that MSMEs should be the primary focus of any immediate relief efforts, as they remain the most vulnerable to prolonged supply shocks.
The report noted that while standalone credit profiles of banks in emerging Asia could weaken if operating conditions deteriorate further, this may not immediately translate into rating downgrades. This is because a large share of bank ratings in markets such as India and China are supported by government backing. As a result, stress is more likely to first reflect in standalone assessments rather than headline issuer ratings. However, the pace and spread of stress transmission—particularly through rising borrowing costs and weakening cash flows—will be key to determining the extent of any deterioration. Fitch recommended that banks shift exposures away from vulnerable small businesses and retail borrowers who may face lay-off impacts, focusing on shifting exposures from vulnerable MSME segments, import-intensive borrowers, and lay-off-exposed retail cohorts.
Indian banks are currently navigating a multi-factor disruption driven by supply risks linked to West Asia, persistent input cost volatility, and the growing impact of artificial intelligence on employment. These factors are transmitting non-linearly across the system, starting from margins and moving to working capital and eventually affecting income and demand. The analysis points to potential 1-2 quarter lag in rising loan slippages, particularly in unsecured and small-ticket retail segments. While acknowledging government steps including creation of empowered groups, tax relief on fuels and continued export incentives, FICCI's Goenka said more targeted support may be needed if the disruption persists. Measures such as expanding export credit insurance, fast-tracking import approvals and strengthening credit guarantee schemes could help, especially for MSMEs, with clarity on force majeure provisions particularly important for protecting smaller firms from penalties on delayed deliveries.
