Banks and non-bank finance companies (NBFCs) with exposure to tariff-affected sectors are likely to see a revival in lending activity following the reduction in US tariffs from 25% to 18%, though lenders remain cautious as they await the final contours of the trade agreement.
When the US tariff hike was announced in July, there were concerns that export-driven MSMEs — especially in textiles, gems and jewellery — would face pressure, hurting growth and asset quality. However, the sector had export orders till January, which provided a cushion through Q3, and domestic support measures further limited the impact. The fear was of sharper stress in Q4 and early Q1, but that risk has now eased, analysts said.
“While some asset-quality pressure may persist in the near-term, the medium-term outlook remains positive with expected improvement in cash flows of MSMEs,” said Sachin Sachdeva, Vice President, ICRA. According to a Nomura report, as on July-end banks have around 4–12% lending exposure to sectors impacted by tariffs, with direct exposure to the US market being even lower.
NBFCs, which had turned guarded after the initial tariff announcement, are now expected to ease their lending stance as demand improves. “NBFCs had become a little cautious after the tariff announcement, but now they will be more comfortable. To some extent, there will be higher demand for credit and lenders who were guarded will be more open to lending,” said Umesh Revankar, executive vice chairman of Shriram Finance.
Textile exporters expected to be key beneficiaries
Textile exporters, especially MSME clusters, are expected to be key beneficiaries. Salee S Nair, managing director and CEO at Tamilnad Mercantile Bank said that the Indian textile exports to the US had been under pressure due to tariff uncertainty, affecting hubs such as Tirupur.
“With these barriers now easing, we expect a revival in export demand, healthier order pipelines and improved pricing power for exporters. This is likely to translate into higher working capital requirements, capacity expansion and greater demand for structured trade finance and credit support,” he said.
According to their investor presentation, the share of US bound export bound was at 12.52% for Tamilnad Mercantile Bank as on December 31. Out of this, textiles contributed 27%.
Overall, bank lending to export credit, under priority sector, was down nearly 14% on year to Rs 10,749 crore as on December 31, according to Reserve Bank of India’s sectoral deployment data.
Second-order beneficiaries
As per a report by Motilal Oswal Financial Services, banks such as State Bank of India (SBI), Federal Bank and Bandhan Bank are expected to emerge as second-order beneficiaries due to potential improvement in small and medium enterprises (SME) asset quality and credit demand. It also said that certain housing finance companies whose customers had been impacted by tariffs, leading to asset quality issues, would see a revival.