Insufficient monsoon and the threat of El Niño could pose serious risks to Non-Banking Financial Companies (NBFCs) in India, as they may negatively affect rural household incomes and loan repayment capacity. This is prompting major NBFCs to strengthen portfolio monitoring and underwriting in vulnerable segments.
The Indian Meteorological Department (IMD) forecasts that the southwest monsoon in 2026 will be 90 percent of the Long Period Average (LPA), indicating reduced rainfall. For NBFCs, the main concern is not the amount of rain itself, but its impact on crop yields, rural incomes, and clients' ability to service debt.
If prolonged rainfall deficit weakens rural cash flows, it could put pressure on financing for tractors and commercial vehicles (CVs), as well as small business lending.
Company Forecasts and Response Measures
Mahindra & Mahindra Financial Services (Mahindra Finance) has intensified monitoring and underwriting in segments more susceptible to agricultural and rural income fluctuations. Raul Rebelo, CEO and Managing Director, noted that the company assesses the El Niño risk through its impact on rural cash flows, rather than solely through precipitation. He emphasized that the El Niño risk is amplified by the overall state of agricultural cash flows, which depend on crop yields, mandi arrivals, Minimum Support Prices (MSPs), and other factors.
For existing credit portfolios, Mahindra Finance has implemented a highly sensitive monitoring mechanism across all regions, with stress thresholds triggering additional collection measures. Regarding new business, the company has raised entry barriers and required greater participation from borrowers in vulnerable groups, including some Small and Medium Enterprises (SMEs) and mobility clients. The company is also closely tracking its tractor portfolio, considering expected harvests and crop composition during underwriting for borrowers whose solvency is closely tied to agriculture. Furthermore, the company uses loan-to-value ratios as a buffer against potential increases in credit costs.
At Shriram Finance, Executive Vice Chairman Umesh Revankar stated that the company prefers to wait another quarter before forming a clearer picture of the full-year growth forecast, citing uncertainty regarding the monsoon deficit's impact on rural incomes and harvests. Revankar added that they are confident in growth of at least over 15% in the next quarter, and if the situation improves, they can catch up and grow faster. He clarified that the impact of El Niño on crops will become clearer after the second quarter.
HDB Financial Services is also closely watching the monsoon progress due to its potential impact on credit costs. CFO Jaykumar Shah reported that past experience showed that such El Niño-related monsoon impacts were a key factor. Therefore, the company monitors the situation daily and weekly to apply various action plans in a timely manner. Shah also explained that HDB Financial's credit cost ratio of 2.3 percent is an assumption of a stable state, not an official forecast for the financial year 27, as the actual result depends on economic conditions and the development of the monsoon situation.
For NBFCs, the key question over the next two quarters will be whether the rainfall deficit leads to reduced rural incomes and an increase in defaults. Although management does not currently forecast widespread asset quality deterioration, it is preparing portfolios for various scenarios. The most significant impact will be on tractor and CV financing, where repayment capacity is closely linked to farm incomes, freight operations, and the broader rural economy. Thus, the monsoon results in the second quarter may determine whether the strong first-quarter growth can be sustained without a corresponding increase in credit expenses.
