Mumbai: Amid the ongoing West Asia war, a consultancy firm on Tuesday asked banks to shift exposures away from vulnerable small businesses and retail borrowers who may face the impact of lay-offs. There is a need for banks to convert early risk signals into decisive action, EY said in a report.
“This can mean shifting exposures away from vulnerable MSME segments, import-intensive borrowers, and lay-off-exposed retail cohorts, while scaling structurally stronger sectors and resilient secured portfolios,” the report said. It recommended banks to focus on intervening early by resetting covenants, enforcing liquidity buffers, tightening collections, and using preemptive restructuring where cash flow timing is stressed.
The report said multi-factor stress testing, capturing shocks from oil prices, foreign exchange movements, logistics disruptions, and demand volatility, should be used to assess rating migration risks and build expected credit loss buffers. Adopting this approach moves risk management from reactive containment to proactive control, strengthening asset quality and limiting credit costs across the cycle, it said.
The report said the conflict’s domestic transmission is increasingly visible in liquidity consumption across supply chains, and rising input costs and longer lead times are driving greater reliance on bank liquidity through elevated cash credit or overdraft utilisation, stretched receivables, inventory buildups, and short-tenor rollovers. The report said lenders should embed sector-level diagnostics into underwriting and pricing, along with comprehensive borrower assessment based on key financial indicators such as Debt Service Coverage Ratio, Interest Coverage Ratio, and working capital adequacy. Export-oriented MSMEs, especially in apparel, along with chemicals, logistics, and aviation sectors, are facing more acute margin and liquidity pressure, the report said.
In the near term, the bigger risk is rising liquidity use, creating latent asset quality pressure as margins remain tight and cash cycles extend, it said.
A prolonged conflict could lead to job losses and economic disruption in the region, dampening remittance inflows over time and pressuring remittance-dependent households, particularly in states such as Kerala, Gujarat, & Maharashtra, the report said. The first-order impact is typically treasury-led, reflected in volatility in foreign exchange, interest rates, and funding costs, which can quickly affect net interest margins. The second-order impact is borrower-led, seen in margin pressures, longer operating cycles, and rising working capital utilisation, while the third-order impact is demand-led, often emerging with a lag through weaker collections, retail loan slippages, and stress in the MSME segment.