The ongoing conflict in West Asia is making non-banking financial companies (NBFCs) cautious. While immediate effects are limited, prolonged instability could impact credit cycles, demand, and inflation. This article explores how NBFCs are responding to these risks.
The current violence in West Asia has little immediate impact, but non-bank lenders think the true risk is a protracted conflict that could have second-order consequences on demand, credit cycles, and inflation.
NBFCs Respond to Rising Risk
As the conflict in West Asia raises concerns about funding costs, borrower stress, and asset quality, non-banking financial companies (NBFCs) are becoming more cautious about lending, five industry officials told Mint.
Non-bank lenders think the true danger is a protracted conflict, which might have second-order implications on demand, credit cycles, and inflation, even though the immediate effects of the ongoing conflict are still minimal.
Although the war situation is changing, we have begun to exercise extreme caution. On the condition of anonymity, the CEO of a non-banking financial company stated, “It is unjust for us to also draw down and stop the supply, but we have to be very cautious in terms of lending and leverage.”
Impact on Small Enterprises
Lenders claim that small enterprises, particularly those that rely on gas for production, exports, and international trade routes for sales, are showing the first indications of stress. Government policy is protecting some industries, especially when it comes to fuel costs before important state elections, but business leaders have cautioned that this would just postpone the effects.
“We would undoubtedly see an impact if the battle continues until May or June,” stated Umesh Revankar, executive vice-chairman of Shriram Finance Ltd. “There has not been a gasoline price increase so far and the government is unlikely to boost prices before elections.”
“We do not know how much it will influence our day-to-day company, but one thing is sure that there will be some price inflation, which will remain permanent because of this war,” Revankar continued. The results of the April assembly elections in West Bengal, Assam, Tamil Nadu, Kerala, and Puducherry will be announced on May 4.
📉 NBFCs & MSME Exposure
- MSME Loans Outstanding: â‚ą4.4 trillion by end-FY25
- Growth from FY24: â‚ą3.7 trillion
- NBFC Role: Increasing in MSME lending through digital platforms
- Credit Share: ~10% of total NBFC credit by end-March 2025
- Sector Risk: Small enterprises relying on fuel and exports first affected
Supply Disruptions and Industrial Stress
Due to the closing of the Strait of Hormuz, a vital international transit route, and damage to Gulf energy infrastructure during the West Asia conflict, India is experiencing a scarcity of crude oil and gas, which is limiting supplies and impacting commercial operations.
According to data from Care Ratings, non-bank financiers owed micro, small, and medium-sized businesses (MSMEs) around â‚ą4.4 trillion at the end of FY25, up from â‚ą3.7 trillion in FY24. Even though NBFCs only make up a small portion of all MSME loans, they have been doing well in this market thus far.
Comparison to Covid-19 Crisis
Experts compared it to the Covid-19 crisis, which was mitigated by government assistance and regulatory leniency. The current scenario, though, might unfold differently.
“The government intervened swiftly with forbearance measures during the pandemic,” stated Siddhart Goel, director of non-bank financial institutions at Fitch Ratings. Rural financiers were under the most pressure, and gold lenders were the most resilient. This time, cost concerns and sector-specific exposure will have a greater influence.
If industrial output slows, vehicle financing—especially for new commercial vehicles—may be more stressed, but gold loan companies should be pretty safe.
⚠️ Lending Caution Amid Conflict
- Selective Disbursement: NBFCs tightening underwriting standards
- Bank Concern: Commercial banks worried as NBFCs lend to small businesses
- Export Strain: Engineering, jewelry, diamonds, and auto parts impacted
- High Exposure: NBFCs with unsecured and MSME loans most vulnerable
- Funding Costs: Banks repricing risk, raising NBFC lending costs
Projected Impact on NBFCs
NBFCs that are more exposed to unsecured loans and MSMEs are probably going to experience the most difficulties. As banks reprice risk, their (NBFCs) funding costs will increase. Additionally, because they lend to vulnerable areas, asset quality may deteriorate, the banker continued. Fuel shortages are causing early disruptions in small enterprises, according to another industry leader.
“The lack of petrol is causing stress. Many of the clients who would have been eligible for loans for affordable housing would also be at risk for MSME loans because many MSMEs have closed restaurants. This official stated, “I do observe a jump in asset quality across unsecured MSME lending, affordable housing, and unsecured personal loans in Q1 (April-June of FY27).”
This executive said, “The widespread consensus is that the war will end, but if it doesn’t, the cascading impact across industries, borrowers, and credit costs will be hard to ignore.”
Resilience Factors
In the meantime, NBFCs with longer-tenure loan books and less exposure to unsecured lending—which are often less susceptible to shocks—are favored by IIFL Finance’s sensitivity analysis in a study dated March 23.
According to the sensitivity study, since the US-Israeli war with Iran started on February 28, higher bond yields have already caused NBFCs to slash their profitability by 2–7% as lenders account for slower growth and rising lending costs.
Lenders are preparing for a negative outcome, even if the base case considers that the conflict might not worsen.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Consult professional financial advisors before making lending or investment decisions.
