What is the story about?
The ongoing West Asia conflict is beginning to transmit into India’s financial system through liquidity stress, margin pressures, and emerging credit risks, according to an analysis by EY India.
The report said the disruption is now extending beyond energy and trade into financial intermediation, with higher crude volatility, elevated freight and insurance costs, and foreign exchange pressures feeding into working capital cycles and borrower cash flows.
EY India flagged that these shifts are increasing reliance on bank funding, particularly among MSMEs and trade-linked sectors.
“Rising input costs, longer transit times, and delayed receivables are driving higher utilisation of working capital limits and stretching cash conversion cycles,” the firm said.
Early stress signals building in credit portfolios
The analysis highlighted that stress is emerging first in liquidity indicators rather than delinquencies. Irregular cash flows, rising receivable days, higher CC/OD utilisation, and delayed GST filings are acting as early warning signals across borrower segments.
This is expected to translate into asset quality pressure with a lag of one to two quarters, particularly in unsecured retail and small-ticket secured loans. “Cash-flow volatility is likely to precede formal delinquencies, challenging traditional risk models,” EY India said.
Banks are also facing non-linear transmission of risks—from margin compression to working capital stress and eventually to income disruption—especially in sectors directly exposed to the conflict such as oil, aviation, logistics, and chemicals.
Trade finance friction tightening liquidity
Operational disruptions in trade finance are compounding funding stress. Longer settlement timelines, delays in letters of credit, tighter sanctions screening, and selective de-risking by global banks are increasing working capital lock-ups.
Export-oriented MSMEs—including apparel, chemicals, and logistics—are among the most impacted, with margin compression and liquidity strain intensifying due to higher freight, insurance, and energy-linked input costs.
Insurance repricing adds to cost pressures
The insurance segment is seeing rapid repricing, with war risk premiums rising sharply across marine and aviation lines. Trade credit insurance is also becoming costlier as insurers factor in higher counterparty default risk, adding to overall financing and transaction costs for businesses.
Remittances, payments face downside risks
EY India noted that around 35–40% of India’s inward remittances originate from GCC countries, exposing flows to geopolitical disruption. While near-term inflows may see temporary support, prolonged conflict could affect employment in the region and weigh on remittance-dependent households.
On the payments side, higher fuel costs and supply chain disruptions could initially inflate transaction values but may eventually dampen volumes if trade activity and consumption weaken.
Shift toward proactive risk management
Against this backdrop, EY India said banks may need to move toward anticipatory risk frameworks, incorporating sector-specific stress diagnostics, cash-flow-based monitoring, and multi-factor stress testing.
The firm added that lenders could rebalance portfolios toward resilient segments with stronger balance sheets and stable demand visibility, while closely managing exposure to import-intensive and liquidity-stressed borrowers.
“Second- and third-order effects—spanning working capital strain, payment delays, and employment-linked stress—are likely to build over the coming quarters,” EY India said, adding that timely intervention and early signal tracking will be critical to containing credit costs and preserving balance sheet resilience.
The report said the disruption is now extending beyond energy and trade into financial intermediation, with higher crude volatility, elevated freight and insurance costs, and foreign exchange pressures feeding into working capital cycles and borrower cash flows.
EY India flagged that these shifts are increasing reliance on bank funding, particularly among MSMEs and trade-linked sectors.
“Rising input costs, longer transit times, and delayed receivables are driving higher utilisation of working capital limits and stretching cash conversion cycles,” the firm said.
Early stress signals building in credit portfolios
The analysis highlighted that stress is emerging first in liquidity indicators rather than delinquencies. Irregular cash flows, rising receivable days, higher CC/OD utilisation, and delayed GST filings are acting as early warning signals across borrower segments.
This is expected to translate into asset quality pressure with a lag of one to two quarters, particularly in unsecured retail and small-ticket secured loans. “Cash-flow volatility is likely to precede formal delinquencies, challenging traditional risk models,” EY India said.
Banks are also facing non-linear transmission of risks—from margin compression to working capital stress and eventually to income disruption—especially in sectors directly exposed to the conflict such as oil, aviation, logistics, and chemicals.
Trade finance friction tightening liquidity
Operational disruptions in trade finance are compounding funding stress. Longer settlement timelines, delays in letters of credit, tighter sanctions screening, and selective de-risking by global banks are increasing working capital lock-ups.
Export-oriented MSMEs—including apparel, chemicals, and logistics—are among the most impacted, with margin compression and liquidity strain intensifying due to higher freight, insurance, and energy-linked input costs.
Insurance repricing adds to cost pressures
The insurance segment is seeing rapid repricing, with war risk premiums rising sharply across marine and aviation lines. Trade credit insurance is also becoming costlier as insurers factor in higher counterparty default risk, adding to overall financing and transaction costs for businesses.
Remittances, payments face downside risks
EY India noted that around 35–40% of India’s inward remittances originate from GCC countries, exposing flows to geopolitical disruption. While near-term inflows may see temporary support, prolonged conflict could affect employment in the region and weigh on remittance-dependent households.
On the payments side, higher fuel costs and supply chain disruptions could initially inflate transaction values but may eventually dampen volumes if trade activity and consumption weaken.
Shift toward proactive risk management
Against this backdrop, EY India said banks may need to move toward anticipatory risk frameworks, incorporating sector-specific stress diagnostics, cash-flow-based monitoring, and multi-factor stress testing.
The firm added that lenders could rebalance portfolios toward resilient segments with stronger balance sheets and stable demand visibility, while closely managing exposure to import-intensive and liquidity-stressed borrowers.
“Second- and third-order effects—spanning working capital strain, payment delays, and employment-linked stress—are likely to build over the coming quarters,” EY India said, adding that timely intervention and early signal tracking will be critical to containing credit costs and preserving balance sheet resilience.
