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The report said Indian lenders are entering the current phase from a position of strength, with improved asset quality and stronger standalone credit profiles. However, higher energy prices, tighter liquidity conditions and weakening external demand could gradually weigh on profitability and borrower repayment capacity over time.
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“Indian banks appear better placed than many regional peers to absorb a moderate deterioration in operating conditions,” Fitch said.
Margin pressure, tighter liquidity risks
Despite relative resilience, the report flagged emerging pressures on earnings.
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Fitch estimates that continued global risks could compress sector margins by 20–30 basis points by FY27 and reduce operating profits by around 30–40 basis points. The banking system’s liquidity surplus has already declined to about 0.5 per cent of deposits, indicating tighter funding conditions.
Measures to support the rupee could further constrain liquidity, though currency volatility is not expected to have a significant direct impact on banks.
Even so, strong domestic funding and sovereign backing are likely to support overall credit stability, with sufficient earnings buffers helping absorb potential stress.
Gradual stress build-up across region
Zooming out, banks across South and Southeast Asia face the clearest credit risks from a prolonged conflict in the Middle East, though the impact is expected to build gradually rather than trigger immediate stress.
Higher energy prices, supply-chain disruptions and weaker remittance flows are likely to weigh more heavily on emerging-market banking systems, where borrower resilience is relatively lower.
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Fitch said asset-quality pressure would first emerge in more vulnerable segments such as retail, micro-enterprises and small and medium enterprises (SMEs), particularly in economies exposed to trade disruptions and commodity price volatility, including India, the Philippines and Thailand.
Sectors with high energy intensity—such as refining, chemicals and manufacturing—are also more exposed to rising costs, while SMEs remain more vulnerable than larger corporates in an economic slowdown.
Standalone risks vs ratings stability
The report noted that while standalone credit profiles of banks in emerging Asia could weaken if operating conditions deteriorate further, this may not immediately translate into rating downgrades.
This is because a large share of bank ratings in markets such as India and China are supported by government backing. As a result, stress is more likely to first reflect in standalone assessments rather than headline issuer ratings.
However, the pace and spread of stress transmission—particularly through rising borrowing costs and weakening cash flows—will be key to determining the extent of any deterioration.
Overall, while Indian banks remain better positioned than many regional peers, sustained global shocks could gradually test their resilience, with the impact becoming more visible over time rather than through an immediate disruption.
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