The ongoing conflict in West Asia is triggering a multi-layered economic shock that is reshaping risk, liquidity and profitability across India’s financial services sector, according to an analysis by EY India.
The report highlights that what began as a geopolitical crisis has evolved into a broader economic disruption, transmitting through energy markets, trade routes, insurance capacity and logistics networks. This shift is pushing up costs across the system, with crude volatility, foreign exchange pressure and a 40–50 per cent rise in war risk premiums across marine, aviation and trade credit significantly repricing inputs.
For India, the immediate effects are visible in higher freight and insurance costs alongside currency volatility, with the rupee threatening to breach the Rs 100 mark against the USD. However, EY India notes that the deeper impact lies in the delayed transmission into bank margins, working capital cycles and household incomes, creating second- and third-order risks that are harder to detect through conventional models.
Indian banks are already navigating what the report calls a “non-linear transmission” of stress, where pressures move from margins to working capital and eventually into income stress across ecosystems. This has led to rising cash flow volatility, often preceding formal delinquencies and challenging traditional credit risk frameworks.
Stress is uneven across sectors. Industries with direct exposure — including oil, aviation, logistics and chemicals — are facing immediate margin compression and liquidity pressure due to higher input costs and longer transit times. Meanwhile, sectors such as auto ancillaries, cement and MSME manufacturing are experiencing delayed stress as rising costs combine with weaker demand and slower pricing pass-through.
The report also flags the role of artificial intelligence in amplifying risks. Employment disruptions are more pronounced in IT services and business process outsourcing, creating what EY India describes as a “double bind” for retail borrowers. Inflation and income uncertainty are simultaneously squeezing urban lower-middle-class households, even as headline macro indicators remain stable.
A key concern emerging from the analysis is rising working capital stress across supply chains. Companies are increasingly relying on bank liquidity as input costs rise and receivable cycles lengthen. This trend is particularly acute among MSMEs and export-oriented sectors such as apparel, chemicals and logistics, where exposure to disrupted trade routes and volatile energy costs is high.
Export-focused MSMEs in apparel, for instance, face added vulnerability, with around 11.8 per cent of India’s apparel exports linked to West Asia markets directly affected by the conflict. Rising feedstock and gas-linked input costs are further compressing margins, forcing some firms to reduce capacity utilisation or shorten production cycles.
Despite stable order books in some cases, EY India warns that borrowers with concentrated client bases or weak receivables management could deteriorate rapidly. Payment delays by larger “anchor” firms are cascading through supply chains, increasing liquidity dependence and transmitting stress downstream.
Trade finance is also emerging as a constraint. Disruptions in logistics and stricter sanctions screening are extending settlement timelines and increasing counterparty risk. Delays in letter of credit confirmations and cross-border payments are locking up working capital for longer periods, further tightening liquidity conditions.
At the same time, sanctions-related risks are reshaping banking operations. Constraints on payment processing and correspondent banking relationships are influencing trade finance capacity, particularly as supply chains shift towards higher-risk geographies.
In response, EY India suggests that banks need to shift from reactive risk management to a more anticipatory approach. This includes embedding sector-specific diagnostics into underwriting, conducting multi-factor stress tests and strengthening early warning systems to detect stress 60–90 days before it translates into non-performing assets.
Beyond risks, the report identifies emerging opportunities. Volatility is accelerating consolidation in favour of companies with stronger balance sheets and pricing power, while demand is rising for structured trade finance, supply chain solutions and hedging products.
The impact is also visible in payments and remittances. Around 35–40 per cent of India’s USD 138 billion inward remittances originate from Gulf Cooperation Council countries, with the UAE corridor alone contributing roughly USD 22 billion annually. While short-term inflows may rise as savings are repatriated, a prolonged conflict could dampen remittances due to job losses in the region.
Travel and cross-border spending are already under pressure due to airspace closures and higher costs, affecting card transactions and remittance outflows. Domestic payment trends may initially show higher nominal values due to inflation, but underlying volumes could weaken over time.
In insurance, the conflict has triggered sharp repricing and tighter underwriting. War risk premiums on key shipping routes have surged more than 1000 per cent, while aviation premiums have risen by 50–70 per cent. Trade credit insurance is also becoming more expensive amid rising default risks.
Claims are increasing across segments, with travel insurance reporting a 35 per cent rise in claims and life insurers seeing a 10–15 per cent increase linked to conflict-related factors. Reinsurers are responding by tightening terms and reducing exposure in high-risk areas, adding further cost pressures.
The report concludes that the most significant risks to India’s financial system will emerge over time, as prolonged geopolitical stress feeds into margins, employment and payment behaviour. This delayed impact could drive a gradual rise in asset quality stress, particularly in MSME and retail portfolios. |
