Moody’s flags higher risks for Indian banks from Middle East crisis as oil prices stay elevated

Amid the ongoing stalemate over US-Iran deal, credit rating agency Moody’s Ratings on Wednesday said Indian banks are among the more exposed lenders in the Asia-Pacific region to risks arising from the ongoing Middle East crisis because of India’s heavy dependence on energy imports from the region, PTI reported.The ratings agency said sustained high oil prices could increase pressure on inflation, interest rates and borrower cash flows, while also affecting loan quality and profitability of banks."Indian banks are among the more exposed in the region, given the economy's high dependence on energy imports from the Middle East and the consequent pressure on inflation, interest rates and borrower cash flows," Moody’s said in a report.The agency said higher fuel costs would strain household budgets and raise debt-servicing burdens for households and small businesses, leading to gradual stress in retail and SME loan portfolios.Moody’s said its revised central scenario assumes disruption in the Strait of Hormuz through the third quarter of 2026, with crude oil prices averaging between $90 and $110 a barrel for much of the year."Our new central scenario reflects a sustained Strait of Hormuz disruption through the third quarter of 2026, with oil prices averaging USD 90-110 per barrel during much of the year," it said.The report noted that tighter financial conditions, weaker economic growth, elevated inflation and currency pressures across energy-importing economies could negatively affect banks across the Asia-Pacific region.India’s non-banking financial companies (NBFCs) may face greater pressure because of their significant exposure to unsecured retail loans, where asset quality deterioration is expected, Moody’s added.At the same time, the agency said Indian banks currently have adequate capital and provisioning buffers."On the positive side, Indian banks enter this period with good capital and provisioning buffers, positioning them well to absorb credit losses without threatening solvency," Moody’s said.The report also said the Reserve Bank of India could face pressure to raise interest rates to contain inflation and currency weakness, which may increase banks’ funding costs and amplify risks to credit quality.Moody’s, however, said the impact on agricultural lending may remain relatively moderate because adequate fertiliser stockpiles could help limit import cost shocks, although higher diesel prices may still affect farm cash flows.