U.S. tariff to have minimal impact on Indian banks

Indian banks are likely to experience little impact from U.S. tariff actions, due to the country’s well-diversified export portfolio, according to Moody’s Investors Service. Although the overall outlook for the sector remains stable, the agency forecasts a moderate decline in asset quality, especially in unsecured retail loans, microfinance, and small business lending. ICRA, a Moody’s affiliate, stated that non-bank lenders are well-positioned to handle challenges in loan quality and regulatory changes, thanks to their strong capital base and healthy earnings performance.

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India’s limited and diversified export profile will help shield its banking sector from the impact of recent U.S. tariff actions, global rating agency Moody’s Investors Service said on Wednesday. The agency reaffirmed a stable outlook for the Indian banking system, supported by a favourable operating environment driven by increased government capital spending, tax relief for middle-income earners, and accommodative monetary policy to spur consumption.

However, Moody’s noted that asset quality in the banking sector may see a “moderate deterioration” following significant improvements in recent years. This expected decline is attributed to rising stress in unsecured retail loans, microfinance, and small business lending. The agency also projected a dip in bank profitability compared to FY25, although it expects the impact to be modest due to a gradual decline in net interest margins (NIMs).

Despite these headwinds, Indian banks are likely to maintain strong capitalisation, supported by steady internal capital generation that matches asset growth, along with ready access to the country’s deep domestic equity markets.

Meanwhile, Icra Ratings, a domestic unit of Moody’s, highlighted that non-bank lenders are well-positioned to weather challenges related to asset quality and regulatory changes, thanks to their robust capital buffers and solid earnings. It expects these lenders to grow at a slower pace of 16–18% in FY26, compared to recent years. However, it flagged the potential spread of stress into secured asset segments as a key area to watch.