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Indian lenders brace for impact amid looming tariff uncertainty; systemic risk seen to be limited while asset quality continues to remain resilient

ICICIdirect Research 29 Aug 2025 DISCLAIMER

Asset Quality remained resilient – Despite stress seen in certain pockets (unsecured retail credit, MFI), asset quality continues to remain resilient. GNPA and NNPA ratios show continuous moderation across industry, with industry GNPA reducing from 3.8% in Q1FY24 to 2.3% in Q1FY26, and NNPA declining from 1.0% to 0.5% over the same period.
Continued focus on provision coverage – While moderation was witnessed in NPA trend, banks continued to strengthen provision coverage with PCR increasing from ~73.6% in Q1FY24 to ~78.2% in Q1FY26.
Asset quality witnessed marginal volatility - Slippages have witnessed marginal uptick amid exposure to MFI and unsecured retail segment, however, stress accretion continues to remain in a broad range largely offset by accruing recoveries. Thus, expect gradual normalisation in credit costs supporting earnings from H2FY26 onwards.


Tariff impact on banks

Escalation in tariff on Indian exports is expected to impact small export-oriented business sectors including textile, chemicals and gems & jewellery. While such protectionist policies could impact job market as these sectors being labour-intensive, impact of banks is seen to be limited given exposure to such industries accounting for ~3.5% of total non-food credit.
Further, banks typically extend mid-to large-ticket loans which are largely secured and diversified across sectors, limiting instances of asset quality stress for lenders. However, given near-term stress for select SMEs, amid tariff shocks, delays in re-payment is not ruled out.
Thus, GoI and RBI is undertaking a slew of measures to support MSMEs abating the impact through diversification of exports, providing liquidity in banking system and boosting domestic consumption, while direct measures to support export-oriented units could be in the offing.
Bank-wise exposure indicated exposure to sectors with anticipated impact remains in low to mid-single digit, with Karur Vysya Bank, Federal Bank and City Union Bank, being outliers with relatively higher proportion of asset base.

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