Mumbai, March 27 -- Non-bank lenders are growing cautious about lending as the war in West Asia raises concerns over funding costs, borrower stress and asset quality, according to industry executives. While the immediate impact remains limited, non-banking financial companies (NBFCs) see the real risk in a prolonged war, which could trigger second-order effects across inflation, demand and credit cycles, multiple executives told Mint. "...we have started becoming very cautious but the war situation is also evolving. It's unfair for us to also pull down and stop the supply, but we have to be very cautious in terms of lending and leverage," the head of an NBFC said on the condition of anonymity. India is facing oil and gas shortages as the closure of the Strait of Hormuz, a key global transit route, and damage to Gulf energy infrastructure are constraining supplies and disrupting business operations. According to lenders, the first signs of stress are emerging in small businesses, especially those dependent on gas for production, exports and global trade routes for sales. While government policies, particularly on fuel prices ahead of key state elections are shielding some sectors, the executives warned this may only delay the impact. "There has been no fuel price hike so far and the government is unlikely to raise prices before elections, but if the war continues into May or June, then we will definitely see an impact," said Umesh Revankar, executive vice-chairman at Shriram Finance Ltd. "One thing is clear that there will be some price escalation, which will remain permanent because of this war, but how much it will affect our day-to-day business, we don't know," he added. Assembly elections in West Bengal, Assam, Tamil Nadu, Kerala, and Puducherry are scheduled to be held in April, with the results set to be declared on 4 May. NBFCs had outstanding loans of about Rs.4.4 lakh crore to micro, small, and medium enterprises (MSMEs) at the end of 2024-25, up from Rs.3.7 lakh crore in 2023-24, according to data from Care Ratings. While the share of NBFCs in total MSME loans might be small, they have been going strong in this segment so far. In lending to the MSME sector, NBFCs are increasingly establishing their presence by offering customized products and leveraging digital lending platforms, highlighted a December report by the Reserve Bank of India (RBI). "The proportion of credit to MSMEs in the total credit extended by NBFCs has been on the rise, reaching nearly 10% by end-March 2025, highlighting its growing role in catering to the needs of MSMEs," the RBI report said. Experts have drawn parallels with the covid-19 disruption. But the government's support and regulatory forbearance helped cushion the sector at the time. The current situation may play out differently. "During the pandemic, the government stepped in quickly with forbearance measures," said Siddhart Goel, director of non-bank financial institutions at Fitch Ratings. "Gold lenders were the most resilient, while rural financiers faced maximum pressure. This time, the impact will depend more on sector-specific exposure and cost pressures." Vehicle financing, particularly new commercial vehicles, could see sharper stress if industrial output slows, while gold loan firms are expected to remain relatively insulated. Lenders are tightening underwriting standards and becoming more selective in disbursements. Commercial banks are also concerned, as they serve as key lenders to NBFCs while also lending directly to small businesses. "Auto components, engineering goods, gems and jewellery exports are already seeing pressure. Shipping costs are rising and the Middle East is a key trading block for us, so both direct and indirect impacts are playing out," a banker said on the condition of anonymity. NBFCs with higher exposure to MSMEs and unsecured lending are likely to face the biggest challenges. "Their (NBFCs) funding cost will go up as banks reprice risk. At the same time, asset quality could deteriorate because they lend to vulnerable segments," the banker added....