Indian banks are likely to re-evaluate their corporate and SME (Small and Medium Enterprise) lending plans after the US imposed 25 percent tariffs on Indian exports, raising uncertainty for trade-linked borrowers and credit growth.
Similarly, better pricing in the corporate bond market will also weigh on the corporate loan of banks in the coming quarters.
KVS Manian, CEO of Federal Bank, said during the Q1 FY26 post-results media call that while the situation isn’t alarming yet, it warrants close monitoring. “There’s clearly no reason to panic right now, but it’s monitorable,” he noted.
He added that credit demand from corporates will remain a little weaker in FY26.
According to Reserve Bank of India (RBI) data on sectoral deployment of bank credit, corporate and SME loan growth has slowed to 6-9 percent year on year (YoY), down from the 12-15 percent pace seen in the second half of 2024, according to RBI data.
This is a marked comedown from the post-COVID lending boom. Now, with the US levying tariffs on certain goods, banks may be watching for the ripple effects on credit demand, as tariffs are expected to strain growth for export-oriented companies, which form a significant share of corporate borrowers.
While some banks are wary of the impact of US tariffs on exporters, others point to a more structural factor behind the moderation in corporate credit demand, which is the growing appeal of cheaper funding avenues.
On the other hand, after the start of the rate cut cycle by the RBI, corporates are seen tapping the bond market to avail funds at cheaper rates and reduce the borrowing cost on the book.
The central bank, since February this year, has reduced key repo rate by 100 basis points (bps), leading to over 50-60 bps fall in rates on corporate bonds and commercial papers.
“Many of the corporates are able to go to the bond market and the ECB (external commercial borrowing) market to get cheaper funds, which is cheaper than the bank’s loan,” said Debadatta Chand, MD & CEO of Bank of Baroda. “Because of that, I think the loan growth in the corporate segment has been slightly lower.”
This shift has affected the pricing power and margin dynamics for banks. According to a recent CareEdge Ratings report, banks’ net interest margins (NIMs) have come under pressure due to slower credit pickup.
In Q1 FY26, NIMs for public sector banks declined by 26 basis points YoY, while private sector banks saw an 18 bps drop. The primary reason, according to the report, is muted growth in both corporate and unsecured retail segments.
A latest DBS report, ‘Macro Insights Weekly’, said that the re-imposition of tariffs is not merely a trade policy tool, but part of a broader fiscal and geopolitical strategy. The report noted that while the markets initially took the August 1 tariff wave in stride, the long-term effects on export competitiveness and margins could be substantial.
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