India’s textile sector is under increasing financial stress as banks begin tightening credit to the industry in the wake of steep US tariff hikes. The sector, already grappling with rising input costs and slowing export demand, is now facing a new layer of uncertainty after US President Donald Trump’s decision to double tariffs on Indian goods, including garments and textiles, from 25% to 50%.
“The tariff hike could severely dent order books, compress profit margins, and put thousands of jobs at risk,” said a senior industry executive.
Rising Stress, Shrinking Credit
Though signs of stress in the textile industry were evident even before the tariff announcement, the recent move has accelerated concerns. Banks are now reassessing their exposure to the sector, especially after non-performing assets (NPAs) in textile lending breached 9% in FY24.
According to RBI data, bank credit to the textile sector grew 38% between FY19 and FY25, but the compound annual growth rate was a modest 5.5%, significantly lower than other key sectors such as infrastructure or MSMEs.
“Banks have moved into a defensive lending stance. Risk premiums are rising, and we don’t expect credit growth in FY26 unless there’s a strong policy push,” said a top commercial banker.
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Credit Conditions Tighten Further
Lenders have reportedly begun pulling back even non-fund-based facilities, such as letters of credit and export credit limits. These were once standard tools for textile exporters but are now subject to tighter scrutiny.
Additionally, interest rates for working capital loans in the textile space have risen by 30 to 60 basis points, as lenders demand higher risk premiums. Some banks are even preferring to lend to overseas subsidiaries of Indian textile firms rather than the domestic entities.
“We prefer lending to their Thailand or Indonesia arms, where tariff risk is lower and business visibility is better,” a banker revealed.
Exporters Scramble to Diversify
With US buyers cancelling orders or demanding lower prices, Indian textile exporters are being forced into tough choices—slash prices and operate at a loss or delay shipments and risk losing customers.
In response, several larger players are exploring options outside the US, eyeing markets like the EU, Japan, and the Middle East, or even relocating parts of their operations to Southeast Asia to bypass tariffs.
“Without aggressive government support, credit flow to the textile sector could dry up further,” said an industry insider.
Government Support Not Enough Yet
While government initiatives such as the PM MITRA mega textile parks, RoSCTL, and Credit Guarantee schemes have provided some cushion, industry voices say they’re not enough to offset rising costs or improve demand fast enough.
Exporters are calling for urgent intervention as the Apparel Export Promotion Council (AEPC) and FIEO warn of large-scale layoffs and potential closure of nearly 55% of MSME exporters catering to the US market.
Wider Implications
The financial sector’s concerns extend beyond textiles. If the sector’s downturn deepens, it may spill into employment figures, regional economies, and the health of broader banking portfolios—especially in regions where textile clusters dominate.
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