Mumbai: Banks’ asset quality is unlikely to take a significant hit from disruptions caused by the ongoing West Asia war, with bad loans expected to remain broadly stable, Crisil Ratings said on Friday. The agency, which factored in the conflict and its after-effects persisting for three to four months, said a stress test across 30 sectors showed limited impact on most corporate credit profiles, even as pressure is expected to be higher in micro, small and medium enterprises.
“Banks are expected to keep their gross non-performing assets (NPAs) in check at 2.0-2.2% by the end of March 2027, compared with a historical low of an estimated ~2.0% as of March 2026,” Crisil said.
While the ratings agency believes that corporates’ healthy balance sheets will support resilience in their credit quality, loans to the micro, small and medium enterprise (MSME) segment will be hit more due to the war.
The US-Iran war, which started on 28 February 2026, has hit global supply chains, especially in energy, leading to a cascade effect across the economy, putting pressure on inflation as well as growth.
The corporate segment, which accounted for 36% of India’s total bank credit as of March 2026, is expected to see stable gross NPAs of 1.2-1.3% by March 2027. These projections are in line with the 1.2% estimate as of March 2026. These projections stand despite several sectors facing a hit on their revenues and operating profit from the gas supply shock, crude oil-linked price increases, direct trade exposure and rupee depreciation.
The corporates are insulated from the war impact due to their healthy balance sheets backed by lower debt-to-equity ratios and improvement in interest coverage ratio, the ratings firm said.
Stress test results
A stress test of 30 sectors, accounting for 65% of rated corporate debt by Crisil, showed companies in 23 sectors directly or indirectly exposed to the war will see limited impact on credit profiles.
While six sectors could see a moderately negative impact, only one sector such as ceramics will see an adverse impact. Altogether, these seven sectors account for 7% of rated corporate debt, Crisil said.
MSMEs, which comprise 19% of the total bank credit, are likely to see a bigger impact from the war.
“Our base case indicates a modest increase in reported gross NPAs in the MSME segment, to 3.4-3.6% this fiscal from 3.2% last fiscal. MSMEs typically have limited financial muscle to absorb higher input costs, supply-chain disruptions and working capital elongation resulting from the ongoing West Asia conflict,” said Subha Sri Narayanan, director at Crisil Ratings.
However, government and regulatory relief measures, including the recently announced relief scheme, will support MSMEs. The likely introduction of additional support measures, such as a credit guarantee scheme for affected sectors, as seen in the past, during periods of exogenous stress such as the covid-19 pandemic, will support asset quality of banks.
On the retail side, Crisil does not expect any material impact on banks’ asset quality due to tight underwriting standards and overall caution in the segment since the Reserve Bank of India had increased risk weights on personal loans in November 2023.
However, against a backdrop of increased borrower indebtedness, in terms of average household debt as well as the average borrower leverage, the trend in early-bucket delinquencies in the unsecured portfolio of banks does warrant attention, the ratings firm said.
