MUMBAI – While the Indian banking system remains resilient, the escalating West Asia conflict is projected to cause a marginal uptick of 10–20 basis points (bps) in Non-Performing Assets (NPAs) this fiscal year. According to rating agencies CRISIL and ICRA, the stress will likely be concentrated in specific high-exposure segments rather than the broader economy.

Key Vulnerabilities

• MSME and Export Stress: Small and medium enterprises in export-oriented sectors—including ceramics, textiles, gems & jewellery, and specialty chemicals—are at the highest risk due to rising input costs and supply chain disruptions.
• Regional Impact: States like Kerala, which are heavily dependent on remittances from West Asia, could see second-order stress impacting local retail demand and real estate.
• Sector-Specific Hits: The ceramics sector is expected to be the worst hit due to its high dependence on gas, while airlines and auto components face margin pressures from rising fuel costs.

Banking Outlook for FY27

• Asset Quality: Despite localized pressure, the overall credit profiles of large corporates remain strong, cushioned by healthy balance sheets.
• Credit Growth: Bank credit growth is expected to moderate to 13% in FY27, down slightly from previous levels as global uncertainties persist.
• Profitability Risks: Banks may face treasury losses due to bond yield volatility and foreign exchange fluctuations, even as working capital demand from corporates increases.

The agencies conclude that while the "granular" nature of India's retail loan book provides a buffer, the duration of the conflict and oil prices (projected between $85–$100) will be the primary factors in determining the long-term impact on India's financial stability.