Monsoons are emerging as a key macroeconomic variable in the current fiscal and could have a disproportionate impact on agriculture and related segments.
Private consumption was healthy in the last fiscal, and the headline indicators suggest that the trend continued in
Q1 FY2027 despite concerns emerging from West Asia. However, the urban and rural consumer confidence survey by the RBI indicates sustained weakening in May 2026 with the likelihood of increased inflation.
Further, household debt has steadily gone up, largely due to consumption loans, which account for about 60 per cent of their borrowings at present. The adverse impact on disposable income, risk of job loss and the expectation of inflationary pressure would affect consumption. Thus, households/borrowers would face cash flow mismatches, which could lead to them leveraging further.
Banks' agriculture NPAs at 4.5%
In view of the above, lenders are likely to have an elevated risk expectation in the near term, especially in rural markets. Agriculture NPAs of banks, currently at 4.5 per cent and higher than other segments, could witness near-term volatility.
The microfinance segment is facing higher vulnerability, with close to two-thirds of its loans towards borrowers focussed on agriculture and other allied activities and more than 80 per cent of the loans in rural areas.
MFIs tighten credit norms
Microfinance institutions (MFIs) are currently recovering from the loan quality shock, which had impacted their growth and financial performance in 2024 and 2025. The sector has tightened credit underwriting norms to address concerns around borrower overleveraging, which was the key reason for the stress witnessed in the recent past.
Borrowers may face cash flow stress
The added shock of lower agriculture income due to weak monsoon could result in borrowers facing near-term cash flow stress, impacting their debt servicing capability. Thus, notwithstanding the tighter guardrails within which MFIs operate at present, caution based on the macroeconomic data and ground-level signals, like the extent of rainfall distribution, sowing data in their focus areas, volatility in household income and loan bounce rates, etc., is warranted to ensure the adequacy of loan quality.
Loans extended by other NBFCs to rural borrowers include agriculture/agri-allied loans, small unsecured business loans (loan size in the range of ₹1-5 lakh), used vehicle (UV) loans (₹2-6 lakh), personal loans (₹0.1-1 lakh), micro loan against property (₹1-5 lakh) and gold loans.
Agriculture loans to be directly impacted
While agriculture loans would be directly impacted, other unsecured business and personal loans would also see elevated volatility.
Overdues in secured loans too can increase in cases like vehicle loans that are predominantly linked to agricultural activities or businesses, as well as in the case of MLAP, gold loans, etc., which largely cater to the rural/semi-urban ecosystem.
Can gold loans support credit flow?
Gold loans had, in the past, supported credit flow when macroeconomic headwinds intensified. They are expected to be the preferred product even now, though the impact of the recent steep and sustained correction in gold prices on credit offtake remains to be seen.
NBFCs to prioritise loan quality
NBFCs slow down disbursements, tighten their credit norms and prioritise collections and loan quality over loan growth when macroeconomic headwinds intensify.
NBFCs' cost of borrowing can go up due to the inflationary pressure stemming from lower agricultural output and increased risk perception by their lenders. While they can pass on their cost increases to their target borrowers or diversify their product offerings, near-term earnings performance could be affected. NBFCs currently have healthy balance sheets with low leverage and adequate liquidity, while their short-term liabilities remain under control.
NBFCs with a more diversified exposure and lower direct dependency on agriculture will be more immune to the stress in the event of weaker monsoons.
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Disclaimer: This article is written by AM Karthik, senior vice president and co-group head financial sector ratings, ICRA Ltd. Views expressed are his own. Readers' discretion is advised.
 "Weak monsoon raises rural credit risks; cash flow stress likely: ICRA")
