Indian lenders safe tariff shocks but face pressure due to margins and asset stress

MUMBAI: Indian lenders are expected to weather US tariff shocks better than their Asian peers, but falling interest rates will squeeze margins. Non-banks, meanwhile, face slower growth as stress builds in segments like unsecured loans.
Moody’s Ratings said India’s more diversified export base limits the credit impact from new US tariffs.

While higher tariffs have spooked global markets and heightened recession fears, Indian banks are relatively insulated. By contrast, lenders in Vietnam, Thailand, and Bangladesh, with greater export dependence on the US, are more vulnerable.

Moody’s maintains a stable outlook on India’s banking system, underpinned by Govt capital spending, tax relief, and easing monetary policy. Asset quality is projected to slip modestly, especially in unsecured retail and small business loans, but profitability should remain adequate. Net interest margins will narrow gradually, yet banks’ capitalisation will stay robust, supported by internal accruals and market access. Continued Govt backing is expected.

S&P Global Market Intelligence also sees pressure on bank margins as rate cuts loom. NIMs for six large banks are projected to decline by 18 basis points in FY2025 and another 9 bps in FY2026, according to the report. State Bank of India may see a 15 bps drop in FY2025, followed by 9 bps in FY2026. Private banks are likely to sustain earnings, but public-sector lenders, including SBI, Bank of Baroda, and Punjab National Bank, could report lower profits in FY2026.

In the non-bank segment, ICRA sees credit growth slowing to 13-15% in FY2025 and FY2026, down from 17% over the previous two years. Retail credit, which accounted for 58% of the Rs. 52 trillion NBFC book in Dec 2024, has led growth but is now decelerating. Stress is rising in microfinance, personal loans, and credit cards, leading to elevated delinquencies and write-offs. Regulatory changes—such as draft rules on co-lending and gold loans—may improve transparency but could curb near-term growth.

NBFCs remain heavily reliant on bank funding, though ECB inflows and debt issuance rose in FY2025. Liquidity remains adequate, but margins are under pressure as credit costs rise. Return on managed assets is set to fall by 30–50 bps in FY2025–FY2026. Microfinance remains a key risk, with credit costs staying high despite some easing.

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