Bankers are seeing an uptick in working capital loan drawdowns by micro, small and medium enterprises (MSMEs) as the West Asia conflict stretches beyond a month, with fixed cost obligations and delayed receivables putting pressure on cash flows that prompted higher demand for funds.
The sector is likely to see the maximum impact from the ongoing war in West Asia, bankers said. While there has been a limited effect in the March quarter (Q4FY26), the stress is expected to reflect in portfolios in FY27.
“There is some degree of stretching, and there is definitely demand reflected in drawdowns. Possibly, it is to tide over the current situation. However, it is also coinciding with the year-end, which often sees similar trends, so it is difficult to clearly separate the impact,” said a senior banker at a private-sector bank. “At the same time, we have been holding back a bit, so we will have to wait and see how it evolves,” the banker added.
The ceramic cluster in Morbi, Gujarat is one of the industry segments severely impacted by the direct effect of the war on supply chains. Glass industries, particularly those involved in bangle making, are facing disruptions. Rice exporters, especially those dependent on markets in West Asia, have also been impacted. Sectors such as fertilisers are also facing challenges.
“If you look at it, the increase (drawdown of working capital) has not been substantial. That said, I do think it could pick up eventually. If I look at my portfolio, utilisation has not gone up,” said another senior banker at a private sector bank.
When the level of activity is down, working capital requirements should not be very high. However, when activity is low, the ability to cover fixed costs becomes more difficult. From that perspective, "based on what I have been hearing, some stress could emerge," said the second person quoted above.
He also cautioned that there could be some more stress in the next 6-12 months. “Since the situation is only about a month old, the full impact will likely be visible towards the end of April or in May, as these effects tend to play out with a lag,” he added.
According to bankers, another emerging challenge could be rising input costs — raw materials, freight, and shipping — and potential increases in domestic transport costs if diesel prices rise. Packaging material costs have already gone up, and crude-linked industries such as plastics and chemicals show clear cost pressures. As a result, demand for working capital may rise — not due to higher volumes but because of higher input costs per unit. For instance, if input costs rise by 20-30 per cent even as volumes decline, overall funding requirements may still increase.
Bankers have suggested to the Centre and the Reserve Bank of India (RBI) that a time-bound moratorium on debt repayments for MSMEs and mid-corporates could be considered to help them manage cash-flow disruptions without affecting asset quality. Meanwhile, RBI has sought data from lenders on their exposure to the region (West Asia) and the sectors that may be affected. The Centre has also taken stock of the situation and asked banks to submit suggestions.
 "MSMEs' working capital drawdowns on the rise amid West Asia conflict")
