Summary of this article
Indian banks exposed to West Asia energy shock risks
Higher fuel prices may raise loan stress gradually
NBFC and retail loans face growing asset quality pressure
Indian banks are among the most exposed in the Asia-Pacific region to risks arising from the ongoing conflict in West Asia, according to a report released by Moody's Ratings on Wednesday.
The agency said India’s heavy dependence on energy imports from the region could increase inflation, push up interest rates and weaken borrower cash flows. Moody’s has warned that these factors could gradually raise stress in bank loan portfolios, especially among households and small and medium enterprises (SMEs).
Pressure On Borrowers
Higher fuel prices have already increased pressure on consumers’ monthly budgets and repayment capacity, the report said. Banks are expected to see a gradual rise in credit stress in retail and SME loan segments if fuel costs remain elevated.
Oil Prices And Financial Conditions
Moody’s has reported that the impact would not be limited to India and could affect banks across the Asia-Pacific region if energy prices remain high due to a prolonged conflict in West Asia.
The agency’s central scenario assumes continued disruption in the Strait of Hormuz through the third quarter of 2026, with crude oil prices averaging between $90 and $110 per barrel for most of the year.
According to the report, tighter financial conditions in energy-importing economies have increased pressure on currencies, inflation and interest rates. These developments could weaken loan quality and profitability for banks across the region.
Concerns For Non-Bank Lenders
In India, non-banking financial companies (NBFCs) have faced additional pressure because of their large exposure to unsecured retail loans. Moody’s reported that asset quality deterioration is evident in this segment if borrowing costs continue to rise and household finances weaken further.
The report also highlighted the agriculture sector, where Indian banks have sizeable exposure. Moody’s stated that the sector may see only modest deterioration because fertiliser stockpiles are adequate and have limited the impact of higher import costs so far. However, rising diesel prices could still affect farm incomes and cash flows.
RBI Might Have To Raise Interest Rates
Despite these concerns, Indian banks have entered this period with strong capital positions and adequate provisioning buffers. These reserves are expected to help lenders absorb potential credit losses without creating risks to solvency, stated the report.
The agency has also warned that the central bank could face pressure to raise interest rates further to control inflation and support the local currency.
