NBFCs are cautious about rural lending as weak monsoon threatens repayments

Mumbai: Non-banking finance companies (NBFCs) are becoming wary of rural lending as deficient monsoon rainfall and El Nino-related drought risks threaten farm incomes, consumption and borrowers’ ability to repay, forcing lenders to tighten monitoring and ease disbursements in distressed areas.

In their earnings calls for the September quarter, Shriram Finance, Mahindra Finance, L&T Finance and HDB Financial Services flagged geographically concentrated risks, particularly in drought-hit parts of western and southern India. While companies have not reported a widespread deterioration in credit quality in rural areas, their commentary points to a more selective approach to lending as the effects of weak collections spill over into cash flows.

The 2026 southwest monsoon ended at 87% of the long-term average (LPA), the weakest rainfall since 2015. The emerging rural stress comes at a time when consumer demand has remained resilient despite the crisis in West Asia. However, the ongoing uncertain geopolitical environment, rising oil prices and the impact of El Nino are fueling price increases, threatening farm incomes and rural purchasing power.

Read also | NBFC stocks plunge 25% in month but ICICI Securities sees potential 50% upside

Headline retail inflation in India rose to 5.54% in September from 4.83% in August, while food inflation accelerated to 7.74% from 5.97%.

India’s largest retail financier by assets under management (AUM) – Shriram Finance – cut its FY27 AUM growth outlook to 15-17% from 18% earlier due to impact of weak monsoon and uncertainty in certain geographies. His AUM stood at approx ₹3.29 trillion at the end of September, up nearly 17% year-on-year.

“Basically, we are a bit cautious because of the impact of the monsoon in certain geographies. That is the main reason to report the conservative numbers,” Umesh Revankar, executive vice-chairman of Shriram Finance, said on Saturday during a September earnings call.

Read also | Best NBFC stocks to buy: HDFC Sec recommends adding 15 stocks to portfolio

Revankar said Maharashtra, Karnataka and Telangana are among the worst affected states where the company has a significant presence. He also said lower agricultural output could weaken incomes, consumption and economic activity, leaving some borrowers struggling to make repayments on time.

The company’s Phase 3 gross assets rose to 4.65% in July-September from 4.64% a quarter ago and 4.57% a year earlier, and Phase 2 gross assets rose to 7.04% from 6.96% a quarter ago and 6.92% a year ago. Credit costs as a share of total assets rose to 2.03% from 1.68%, with management attributing the stress largely to seasonal factors and insufficient rainfall in some regions.

Revankar said stress was not widespread and insisted the company’s long-term credit cost guidance remained at 2%, although costs could temporarily rise by 30-40 basis points in select geographies and products.

Read also | NBFCs should never have provided revolving credit: RBI

Under the expected credit loss framework, the Reserve Bank of India classifies loans into three stages: Stage 1 includes interest-free loans without significant increase in credit risk, Stage 2 includes loans where credit risk has increased significantly, and Stage 3 includes impaired loans, usually those more than 90 days past due.

“The next two quarters could be challenging for the rural economy due to a deficient monsoon. This could have asset quality implications, especially for NBFCs whose customers are predominantly self-employed. Microfinance, unsecured business loans and to some extent tractor finance could face pressure,” said Jinay Gala, director of India Ratings and Research.

“The stress may not show immediately, but from December we may see further pressure on asset quality,” he said.

Mahindra Finance which had an AUM of Rs ₹1.47 trillion at the end of September, is also closely monitoring the impact of lack of rainfall. CEO and CEO Raul Rebello said 282 districts have been classified as drought-prone areas and that the company has boosted collections in those locations while reducing funding in some stressed markets.

The company’s tractor portfolio is particularly exposed to rural economic conditions. Rebello said the impact on collections is still difficult to assess because agrarian market installments are usually paid half-yearly, around the end of the rabi and kharif seasons.

At the same time, he warned against considering the rural economy as uniformly weak. Vehicle registration data showed rural and semi-urban markets grew slightly faster than urban markets through September, he said, although the drought may affect sentiment in categories such as tractors.

During the September quarter, the company’s spending on tractors fell 20% sequentially, a sharper-than-expected decline, indicating increased caution following drought declarations in some states, InCred Equities said in an Oct. 22 report.

Mahindra Finance’s asset quality improved, with Phase 3 gross assets falling to 3.4% from 3.9% a year earlier and Phase 2 assets falling to 4.7% from 5.8%. Credit costs decreased to 1.6% of average assets from 2.2% a year ago.

L&T Finance has also eased lending in areas facing deduction shortages. His rural business payments were ₹6,356 crore in the September quarter, down 9% but up 1% YoY, while its rural book of business grew 22% YoY and 3% QoQ. ₹33,465 million crowns.

“We are also being cautious and that is why you have seen almost flat quarter-on-quarter performance in our rural payments,” CEO and CEO Sudipta Roy said.

The non-bank lender said it has strengthened underwriting guarantees in vulnerable areas and expects rural cash flows to improve after the Kharif harvest, which could boost payouts in the December quarter.

“There will be an adverse impact on asset quality due to the drought situation. It is likely to show more in the fourth quarter than the third quarter,” said Sanjay Agarwal, director, CareEdge Ratings.

“It could have an impact on tractor loans and small unsecured personal loans, especially consumer loans. Microfinance may not see this yet as it has only recently started to recover as a sector,” Agarwal said.