Nbfcs Turn Cautious On Rural Lending As Weak Monsoon Threatens Repayments

(MENAFN- Live Mint) Mumbai: Non-banking financial companies (NBFCs) are turning cautious on rural lending as deficient monsoon rainfall and El Nino-related drought risks threaten farm incomes, consumption and borrowers' repayment capacity, prompting lenders to tighten monitoring and moderate disbursements in vulnerable regions.

Shriram Finance, Mahindra Finance, L&T Finance and HDB Financial Services have flagged geographically-concentrated risks in their September-quarter earnings calls, particularly in drought-affected parts of western and southern India. While the companies have not reported a broad-based deterioration in rural credit quality, their commentary points to a more selective approach to lending as the effects of weak rainfall feed through to cash flows.

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

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India's headline retail inflation 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 asset financier by assets under management (AUM) - Shriram Finance -has lowered its FY27 AUM growth guidance to 15-17%, from 18% earlier, citing the impact of a weak monsoon and uncertainty in certain geographies. Its AUM stood at about ₹3.29 trillion at the end of September, up nearly 17% year-on-year.

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

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Revankar said Maharashtra, Karnataka and Telangana were among the worst-hit states, where the company has a sizable presence. He also said that lower agricultural output could weaken incomes, consumption and economic activity, leaving some borrowers struggling to pay installments on time.

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

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

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Under the expected credit loss framework, the Reserve Bank of India classifies loans into three stages: Stage 1 covers performing loans with no significant increase in credit risk, Stage 2 includes loans where credit risk has risen significantly, and Stage 3 comprises credit-impaired loans, generally those overdue by more than 90 days.

“The next two quarters could be challenging for the rural economy because of the deficient monsoon. This could have ramifications for asset quality, particularly for NBFCs whose customers are largely self-employed. Microfinance, unsecured business loans and, to some extent, tractor financing could face pressure,” said Jinay Gala, director at India Ratings and Research.

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

Mahindra Finance, which had an AUM of ₹1.47 trillion at the end of September, is also closely monitoring the impact of deficient rainfall. Managing director and chief executive Raul Rebello said 282 districts had been classified as drought-prone and that the company had strengthened collections in these 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 was still difficult to assess because instalments in agrarian markets are typically paid half-yearly, around the end of the rabi and kharif seasons.

At the same time, he cautioned against treating the rural economy as uniformly weak. Vehicle-registration data showed rural and semi-urban markets growing marginally faster than urban markets through September, he said, although drought conditions could affect sentiment in categories such as tractors.

During the September quarter, the company's tractor disbursements fell 20% sequentially, a steeper decline than anticipated, suggesting heightened caution following drought declaration in certain states, InCred Equities said in a report on 22 October.

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

L&T Finance has also moderated lending in areas facing rainfall shortfalls. Its rural business disbursements were ₹6,356 crore in the September quarter, down 9% sequentially but up 1% from a year earlier, while its rural business book grew 22% year-on-year and 3% quarter-on quarter to ₹33,465 crore.

“We are also being careful and that is why you saw a near flattish QoQ performance on our rural disbursements,” managing director and chief executive Sudipta Roy said.

The non-bank lender said it had strengthened underwriting safeguards in vulnerable districts and expected rural cash flows to improve after the Kharif harvest, potentially supporting disbursements in the December quarter.

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

“There could be an impact on tractor loans and small-ticket unsecured personal loans, particularly consumption loans. It may not show up in microfinance just yet as it has only recently started recovering as a sector,” Agarwal said.

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