Banks Poised to Cut SME and Corporate Credit Amid U.S. Export Tariffs Impact

Indian banks are poised to reassess their lending strategies to corporate and SME borrowers following the imposition of 25% tariffs on Indian exports by the United States. The trade shock has cast doubt over the creditworthiness of export-linked borrowers, prompting lenders to reassess risk profiles. 

While corporate credit demand has already slowed in recent quarters, bankers warn that trade disruptions may further delay a recovery. 

Loan Growth Slows As Trade Risks Mount
In Q1 FY26, corporate and SME loan growth declined to 6–9% YoY, down from 12–15% in the second half of FY24. The new tariff environment may dampen the appetite for new lending in trade-exposed sectors. 

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K.V.S. Manian, CEO of Federal Bank, emphasised that while the situation is not yet alarming, it warrants cautious monitoring. He expects aggregate credit demand from exporters to remain muted throughout FY26. 

The Shift is also driven by a Broader Structural Change
Many large and mid‑sized firms prefer bond markets and external borrowing over traditional bank loans, attracted by lower borrowing costs and simplified documentation. Institutions such as Bank of Baroda and HDFC report issuances touching multi‑year highs in corporate bonds, further reducing reliance on bank finance. 

The Federal Bank CEO noted that selective lending has become the norm. Banks are prioritising lower-risk, value-accretive clients rather than extending credit uniformly across all corporate borrowers. 

Banks Pivot To Safer Borrowers And Retail Focus
Meanwhile, analysts expect sustained pressure on net interest margins (NIMs). A rating agency report highlighted that public sector banks have seen a 26 bps drop in NIM YoY in Q1 FY26, while private sector banks reported an 18 bps decline—driven by slower loan growth and heightened risk aversion.

Banks are expected to shift focus towards fee-based income, retail lending, and other lower-risk segments. According to analysts, this recalibration comes amid firms increasingly bypassing bank loans in favour of capital market financing.

Conclusion
While Indian banks have managed to navigate recent credit conditions, U.S. tariffs introduce fresh headwinds for export-linked SMEs and corporates. With lending growth already softening, banks are likely to tighten credit terms, shift focus to safer segments, and lean more on alternative funding channels. This strategic reprioritisation may be essential to safeguard asset quality amid rising global uncertainties.