Mumbai: Non-banking financial companies (NBFCs) are turning increasingly cautious on lending as the war in West Asia raises concerns over funding costs, borrower stress and asset quality, five industry executives told Mint.
While the immediate impact of the ongoing conflict remains limited, non-bank lenders believe the real risk lies in a prolonged conflict, which could trigger second-order effects across inflation, demand and credit cycles.
“...we have started becoming very cautious but the war situation is also evolving. It's unfair for us to also pull down and stop the supply but we have to be very cautious in terms of lending and leverage,” the head of a non-banking financial company said on the condition of anonymity.
MSMEs first to feel pressure
According to lenders, the first signs of stress are emerging in small businesses, especially those dependent on gas for production, exports and global trade routes for sales. While some sectors are being shielded by government policy, particularly on fuel prices ahead of key state elections, industry executives have warned that this may only delay the impact.
“There has been no fuel price increase so far and the government is unlikely to raise prices before elections, but if the war continues into May or June, then we will definitely see an impact,” said Umesh Revankar, executive vice-chairman at Shriram Finance Ltd.
“One thing is clear that there will be some price escalation, which will remain permanent because of this war, but how much it will affect our day-to-day business, we don’t know,” Revankar added.
Assembly elections in West Bengal, Assam, Tamil Nadu, Kerala, and Puducherry are scheduled for April, with results to be declared on 4 May.
India is facing crude oil and gas shortages, as the closure of the Strait of Hormuz, a key global transit route, and damage to Gulf energy infrastructure amid the West Asia conflict are constraining supplies and affecting business operations.
Non-bank financiers had outstanding loans of about ₹4.4 trillion to micro, small, and medium enterprises (MSMEs) at the end of FY25, up from ₹3.7 trillion in FY24, according to data from Care Ratings. While the share of NBFCs in total MSME loans might be small, they were so far going strong in this segment.
In a report released in December, the Reserve Bank of India (RBI) pointed out the growing role of NBFCs for the small business segment.
It said that in lending to the MSME sector, NBFCs are increasingly establishing their presence by offering customised products and leveraging digital lending platforms. “The proportion of credit to MSMEs in the total credit extended by NBFCs has been on the rise, reaching nearly 10% by end-March 2025, highlighting its growing role in catering to the needs of MSMEs,” the RBI report said.
Experts drew parallels with the Covid-19 disruption, when government support and regulatory forbearance helped cushion the sector. However, the current situation may play out differently.
“During the pandemic, the government stepped in quickly with forbearance measures,” Siddhart Goel, director of non-bank financial institutions at Fitch Ratings, said. “Gold lenders were the most resilient, while rural financiers faced maximum pressure. This time, the impact will depend more on sector-specific exposure and cost pressures.”
Vehicle financing may weaken
Vehicle financing, particularly new commercial vehicles, could see sharper stress if industrial output slows, while gold loan companies are expected to remain relatively insulated.
Against this backdrop, lenders are tightening underwriting standards and becoming more selective in disbursements. Commercial banks are also concerned, as they are key lenders to NBFCs, which in turn lend to small businesses, while also directly lending to the segment.
“Auto components, engineering goods, gems and jewellery exports are already seeing pressure. Shipping costs are rising and the Middle East is a key trading block for us, so both direct and indirect impacts are playing out,” a banker said, requesting not to be identified.
NBFCs with higher exposure to MSMEs and unsecured lending are likely to face the biggest challenges. “Their (NBFCs) funding cost will go up as banks reprice risk. At the same time, asset quality could deteriorate because they lend to vulnerable segments,” this banker added.
Another industry executive pointed to early signs of disruption in small businesses due to fuel shortages.
“We see stress playing out because of the gas shortage. A lot of MSMEs have stopped restaurants, so a lot of the customers who would have affordable housing loans would also have MSME loan exposure. So, definitely in Q1 (April-June of FY27), I do see a spike in asset quality across unsecured MSME lending, affordable housing and unsecured personal loans,” this executive said.
“The general feeling is that the war will end, but if it doesn’t, the cascading impact across sectors, borrowers and credit costs will be hard to ignore,” this executive added.
Meanwhile, IIFL Finance’s sensitivity analysis in report dated 23 March recommends a similar approach, favouring NBFCs with longer-tenure loan books and lower exposure to unsecured lending, which tend to be less vulnerable to shocks.
The sensitivity analysis showed that elevated bond yields since the US‑Israeli war with Iran began on 28 February have already led to earnings cuts of 2–7% for NBFCs, as lenders factor in slower growth and rising credit costs
While the base case assumes that the conflict may not escalate significantly, lenders are bracing for a downside.