After the Iran war, Indian banks apply 'tighter filters' before approving Gulf lending

The aftermath of the US-Iran war could push the India-Gulf capital relationship in a new direction — one where capital flows remain intact, but Indian lenders price risk more carefully.

Fresh pause: Indian banks stopped fresh lending in Gulf countries in May, focusing on monitoring existing relationships. The country’s two leading state-owned lenders, State Bank of India and Punjab National Bank, decided to withhold new business in the GCC until there is more clarity.

“The broader India-Gulf relationship remains strong, and capital flows are still active [...] but there can be a temporary asymmetry in the corridor. The India side is still attracting Gulf capital, while Indian banks may be more selective in extending fresh risk back into the Gulf,” Kranthi Bathini, equity strategist at WealthMills Securities, tells EnterpriseAM.

Guards up: Indian banks are applying “tighter risk filters” as geopolitical uncertainty in the Gulf has implications for crude oil, shipping, trade flows, and financial-market sentiment, Bathini tells us. “Even if banks are not cutting existing exposure, they may become more careful on trade finance, credit assurances, letters of credit, and working-capital renewals,” he adds.

On the flipside, Gulf investors continue to view India as an attractive market. The Emirates NBD-RBL Bank transaction is one example of Gulf capital showing interest in Indian financial services. Indian banks are also trying to mobilize foreign capital from the region, including through foreign currency deposits from the Middle East.

These banks could ask exporters for stronger cover or tighter documentation before extending or renewing limits if shipping disruptions, delayed documentation, higher ins. costs, currency volatility, and the timing of receivables raise default risk, Bathini says.

Who feels the pressure?

Scale shields: Funding shock or tighter guardrails may not affect large Indian companies with strong balance sheets and established banking relationships; they would affect mid-sized companies. “Mid-sized contractors, exporters, subcontractors, and companies dependent on relationship banking could face difficulty in raising credit assurances, working-capital lines, trade finance or project-linked funding,” Bathini tells us.

Who fills the gap?

“The first natural replacement would be Gulf banks” if Indian banks become more selective, Bathini says, adding, “Emirates NBD, First Abu Dhabi Bank, Mashreq and Abu Dhabi Islamic Bank can step in for some India-linked trade, corporate and project-finance requirements.”

Japanese and European lenders may also participate in larger transactions, depending on the project and sponsor, but they are not a universal replacement for Indian banks, he adds.

Not a structural shift

“I would read this as a temporary risk-management response rather than a structural pullback from the Gulf,” Bathini tells us. The broader India-Gulf relationship, he says, remains strong and capital flows are still active. “The next three to six months will show whether the current caution is a temporary pause or a deeper recalibration,” he says.