El Niño, below-normal rainfall could hit NBFCs' rural loan books

A weak monsoon and El Nino could hurt rural incomes and repayments, prompting major NBFCs to tighten portfolio monitoring and underwriting in vulnerable segments

A below-normal monsoon and the risk of El Niño affecting rural cash flows could emerge as key risks for non-banking financial companies (NBFCs) such as Mahindra & Mahindra Financial Services (Mahindra Finance), Shriram Finance, HDB Financial Services and others, prompting lenders to step up portfolio monitoring and underwriting in vulnerable segments.

 

The India Meteorological Department (IMD) has forecast the 2026 southwest monsoon at 90 per cent of the long-period average, indicating below-normal rainfall. Though IMD continues to forecast below-normal rainfall for August and September amid El Niño conditions, the rainfall deficiency has narrowed from around 37 per cent in June to around 11 per cent now. The weather office has also warned that weak El Niño conditions in the Pacific could strengthen during the monsoon season.

 

For NBFCs, the concern is less about rainfall itself and more about its impact on agricultural output, rural incomes and repayment capacity. Tractor and commercial vehicle (CV) finance, as well as lending to small businesses, could face pressure if a prolonged rainfall deficit weakens rural cash flows.

 

Mahindra Finance has stepped up monitoring and underwriting in segments more exposed to rural and agricultural income. Raul Rebello, managing director and chief executive officer, said the company was assessing El Niño risk through its impact on rural cash flows rather than rainfall alone.

 

“What we see as an El Niño risk is not just rainfall, but it gets amplified overall by rural and agricultural cash flows,” Rebello said during an investor call. He added that rural cash flows depend on agricultural output, mandi arrivals, minimum support prices and other factors.

 

For the existing loan book, Mahindra Finance has put in place a high-sensitivity monitoring mechanism across geographies, with stress thresholds triggering more collection measures. For incremental business, it has raised entry barriers and sought greater borrower contribution from vulnerable segments, including some small and medium enterprises and mobility customers.

 

The company is also closely monitoring its tractor portfolio. Rebello said underwriting for borrowers whose repayment capacity is closely linked to agriculture takes into account expected agricultural output and crop mix. The company is also using loan-to-value ratios as a buffer against a potential rise in credit costs.

 

At Shriram Finance, Executive Vice-Chairman Umesh Revankar said the company would wait for another quarter before taking a firmer view on its full-year growth outlook, citing uncertainty over the impact of the monsoon deficit on rural incomes and agricultural output. “We would like to wait for another quarter because the net impact of the deficit in monsoon is a little less known. So we would like to wait for that. But we are confident that we'll be able to grow more than 15 per cent at least for the next quarter. Then onwards, if things are much better, we feel that we’ll be able to catch up and grow faster,” Revankar said during an investor call. He said the impact of El Niño on agricultural output would become clearer after the second quarter.

 

HDB Financial Services is also closely watching the progress of the monsoon for its potential impact on credit costs. “One of the key things that has impacted us in the past has been El Niño–kind of an impact because of monsoons. So, we’re watching it very closely; we're monitoring it on a daily, weekly basis to make sure if there are any signs that we need to pick up, we need to go in and have different approaches — apply Plan A, Plan B, Plan C, etc,” Chief Financial Officer Jaykumar Shah said.

 

Shah said HDB Financial’s 2.3 per cent credit-cost figure represented a steady-state assumption rather than formal 2026-27 guidance, with the actual outcome dependent on economic conditions and developments in the monsoon.

 

For NBFCs, the key question over the next two quarters will be whether the rainfall deficit translates into weaker rural incomes and higher delinquencies. While managements are not yet forecasting a broad-based deterioration in asset quality, they are preparing portfolios for a range of outcomes.

 

The impact will be particularly important for tractor and CV financing, where repayment capacity is closely linked to farm income, freight activity and the broader rural economy. The monsoon’s performance through the second quarter could therefore determine whether the strong growth seen in the first quarter can be sustained without a corresponding rise in credit costs. 

Risk mitigation

• Tractor and CV financing and MSME lending may take a hit amid the below-normal rainfall forecast
• NBFCs are stepping up portfolio monitoring and underwriting in vulnerable segments and geographies
• High entry barriers for new loans have been put in place to hedge against weak rural income
• NBFCs await clarity, as the second quarter will likely be important for their FY27 growth outlook