When Geopolitics Enters the Bank’s Risk Ledger

Banks know how to navigate financial cycles. What makes the current situation more difficult is the mix of risks. Geopolitics, oil volatility, supply-side disruptions due to Strait of Hormuz interruptions, and tightening liquidity are all in play at once.

The first sign of strain lies in the widening gap between credit and deposit growth. As of February 15, deposits were expanding at 10.9% while credit was growing faster at 13.7%. With outstanding credit at ₹204.3 trillion against deposits of ₹247.7 trillion, the credit–deposit ratio has moved up to 82.5%. The number itself is not alarming. What it signals, however, is a system leaning more heavily on market liquidity to sustain lending.

The Reserve Bank of India has sufficient tools to smooth short-term liquidity pressures. Through the liquidity adjustment facility, banks can manage day-to-day funding needs. The weighted average call rate remains within the corridor defined by the Standing Deposit Facility and the Marginal Standing Facility, currently between 5% and 5.5%. If liquidity tightens, the RBI can inject funds through variable rate repo auctions. If excess funds accumulate, they can be absorbed through reverse repo operations.

Yet liquidity management alone does not capture the full challenge. The more difficult question is whether banks can continue to mobilise lendable resources as the global environment becomes less predictable.

The escalation in West Asia illustrates the point. Direct military confrontation between regional powers began on February 28. Markets reacted swiftly. Global markets came under pressure, while energy markets surged. Oil prices jumped from around $68 a barrel to $100, even touching $119 during the day.  The change in leadership in Iran and its commitment to containing the damage to neighbours should mitigate collateral risks.

Indian markets reflected the uncertainty. Between February 16 and March 9, the SENSEX declined from 83,277 to 77,566, while the NIFTY 50 has been struggling in the 24,000 range. Investor wealth worth roughly ₹27.2 trillion disappeared during that period. Foreign portfolio investors withdrew about ₹218 billion. Over the same stretch, the rupee weakened by 1.86%, moving from ₹90.87 to ₹92.47 against the dollar.

These developments eventually travel beyond financial markets. Businesses become cautious when uncertainty rises. Investment plans are deferred and expansion slows. Supply chains become more fragile. If energy prices remain high, inflation pressures could follow.

Banks feel these shifts indirectly but steadily, through the financial health of their borrowers.

Early Warnings
Credit risk rarely appears suddenly. The early signs are usually visible in borrower behaviour. Companies dealing with weak demand, rising input costs or currency pressures begin to delay repayments.

Credit costs are already moving up. They have risen from 1.4% in 2023-24 to 1.6% in 2024-25 and to 1.8% in the first half of 2025-26. The increase is modest for now, but it bears watching.

Special Mention Accounts provide another useful indicator. Loans where repayments are delayed by 30 or 60 days often appear here before turning into more serious delinquencies. A steady rise in such accounts usually signals that borrower balance sheets are beginning to feel pressure.

Deposit growth may face its own constraints. Inflation reduces households’ ability to save, while higher spending on essentials leaves less surplus to place in bank deposits. If price pressures persist, deposit mobilisation could slow further.

Currency swings complicate matters. A weaker rupee raises import costs for firms dependent on overseas inputs, while unsettled capital markets can disrupt fund-raising and push companies back towards bank credit just as liquidity tightens.

For banks, that means risk management must be more alert.

Risk Management
The writing on the wall is clear: collateral risks could be greater than stakeholders perceive.

Banks may need to complement existing frameworks with stronger internal monitoring. One option would be to establish a dedicated Risk Intelligence Group. Such a unit could track sector-specific developments, monitor early warning signals, and draw insights from across business divisions.

Working alongside operational teams, the group could help prepare a proactive business risk management plan. The objective would be simple. Spotting vulnerabilities early will be critical. The sooner risks are identified, the easier they are to contain.

Better use of data analytics and AI may help. Studying borrower behaviour, sector trends and macroeconomic signals more closely can give banks an earlier sense of where pressure is building. Used sensibly, such tools can strengthen the speed and quality of risk assessment.

Periods of disruption may also call for a degree of regulatory flexibility. Temporary measures of the kind seen during the pandemic could give otherwise sound borrowers the space to manage short-term shocks without weakening the broader credit cycle.

Genuine borrower entities could be granted more time to service bank loans, and handholding with temporary accommodation, wherever necessary, could be examined to avert a decline in asset quality.

Unusual times demand unusual ways to mitigate risks and limit damage. For banks, the challenge will not only be absorbing shocks but anticipating them.

It is time to reflect on the time-tested adage: a stitch in time saves nine.