Micro lenders must map climate risk in underwriting, says report

Bharat Microfinance Report 2026 flags rising climate risks to rural credit as NABARD warns of potential rabi crop stress following a deficient monsoon and urges better underwriting

Microfinanciers must look to integrate climate risk modelling into their traditional credit assessment frameworks to mitigate the rising threat of extreme weather to rural livelihoods, according to the Bharat Microfinance Report 2026.

 

“As erratic monsoons, unseasonal heatwaves, and extreme weather events increasingly disrupt rural livelihoods, geographical vulnerability has become directly tied to credit risk,” the report, released on Thursday, said.

 

"Micro-lenders that combine credit-bureau leverage data with spatially disaggregated climate-vulnerability indices, such as identifying early-warning signals within specific origination cohorts and over-leveraged borrower segments, will stand to manage the next phase of growth with a materially lower risk of repeating the FY 2024-25 stress cycle."

 

 

The prescription comes at a time when the country is staring at a rain-deficient monsoon this year. Notably, microfinance lenders largely serve rural credit demand. The southwest monsoon season ended with a 13 per cent rainfall deficiency, the second-lowest since 2001, according to India Meteorological Department (IMD) records.

 

Addressing stakeholders from microfinance institutions at the Sa-Dhan National Conference on Inclusive Growth, Shaji Krishnan, Chairman of the National Bank for Agriculture and Rural Development (NABARD), warned of risks to the rabi (winter) crop following a rain-deficient monsoon, even if agricultural states report no major shortfalls as of now.

 

“In the near, say, next one or two weeks, if the temperature also goes up, then evaporation of reservoirs will be a concern. Then the Rabi season will have an issue," Krishnan said.

 

Cautioning that traditional credit bureaus do not yet factor weather shocks into credit scores, Krishnan urged lenders to incorporate these datasets into their underwriting processes and decision-making.

 

He also mentioned upcoming interventions on climate risks by regulators, including the Reserve Bank of India. “Climate risk actually is now actually a credit risk. It is not a standalone risk… In fact, RBI is coming out with a risk categorisation. There are some draft guidelines they (RBI) are making. As NABARD, we are setting up data for climate resilient agriculture.”

 

He added that NABARD’s database is nearly complete and will have state-specific insights from partnering states.

 

The push for climate-smart lending comes on the heels of a challenging year for microfinance. According to the report, the sector contracted in 2025-26 (FY26), with credit information companies (CICs) reporting a 13 per cent year-on-year drop in active clients and an 11 per cent decline in total outstanding loans, which stood at ₹3.34 trillion.

 

While the total loan portfolio for the microfinance sector was around ₹3.34 trillion, loan accounts declined by 21 per cent in FY26. Asset quality improved in terms of short- to medium-term delinquencies, even as the portfolio-at-risk ratio for loans more than 180 days past due remained high at 4.73 per cent in FY26, down from 4.83 per cent in FY25, despite full provisioning and write-offs, the report said.

 

Notably, the report termed FY26 a period of consolidation and recalibration as the portfolio turned positive sequentially in the last quarter of that financial year after around eight quarters.