El Nino to Hit NBFC-MFIs, Agri-Equipment Finance, Agri MSMEs Most

“El Niño conditions and possibly subnormal monsoon are unlikely to cause systemic credit stress in rural and semi-urban areas. The impact is likely to be asymmetrical across regions, asset classes and lenders due to variables such as availability of irrigation cover, credit sensitivity of asset classes and diversity in lenders’ books,” says Karan Gupta, Director, Ind-Ra FI.

Some parts of rain-fed Maharashtra and Karnataka face the highest risk, while Tamil Nadu, Andhra Pradesh and Uttar Pradesh benefit from a stronger irrigation cover.

Maharashtra remains the most vulnerable region due to low irrigation in rain-fed regions; Karnataka, on the other hand, presents a moderate, largely localized risk profile. Regions such as Jharkhand, Goa and Chhattisgarh, where irrigation coverage is low and income diversity is limited, especially in the rain-fed belts of central and western India, also remain at risk.

Tamil Nadu and Andhra Pradesh are supported by higher irrigation coverage and more stable agricultural cash flows, while Uttar Pradesh benefits from structurally high irrigation despite indicative deficits.

Beyond total precipitation results, spatial distribution and timeliness may be key determinants of credit impact. A temporal bias in precipitation is more influential than cumulative precipitation; as this coincides with the critical maturity stage of kharif crops and hence affects harvest quality, price realizations and post-harvest cash flows.

Credit sensitivity is highest for non-banking financial companies (microfinance institutions (NBFC-MFIs), tractor and agricultural equipment financing and agriculture-related MSMEs). Large, diversified NBFCs are expected to absorb volatility without creating a lasting impact on asset quality unless shocks escalate.

Diversified lenders benefit from geographic spread, earnings buffers, and collection flexibility. Repayment pressure generally arises after farm cash buffers weaken, with potential stress being pushed into 3Q-4QFY27, particularly when kharif results impact rabbinic finances and subsequent revenue cycles.