NBFCs turn cautious on rural lending as weak monsoon threatens repayments

Non-banking financial companies (NBFCs) are becoming more cautious about rural lending due to weak monsoon rainfall and drought risks, which could affect farm incomes and borrowers' repayment capacity. Shriram Finance, Mahindra Finance, L&T Finance, and HDB Financial Services have warned of geographically concentrated risks in their September-quarter earnings calls, particularly in drought-affected regions of western and southern India.

The 2026 southwest monsoon ended up 87% of the long period average, the weakest rainfall since 2015. Consumer demand has remained resilient despite geopolitical uncertainties, but rising crude oil prices are fueling inflation, threatening farm incomes and rural purchasing power. Shriram Finance reduced its FY27 AUM growth guidance to 15-17% from 18% earlier, citing the impact of poor monsoon and regional uncertainties.

Maharashtra, Karnataka, and Telangana are among the affected states. The company's gross stage 3 assets increased, but its credit cost as a share of total assets rose to 2.03%. Mahindra Finance, with an AUM of ₹1.47 trillion, is also closely monitoring the situation, with 282 districts classified as drought-prone. The company strengthened collections in these areas while reducing funding in stressed markets.

L&T Finance moderated rural disbursements by 9% sequentially but saw a year-on-year growth in its rural business book. NBFCs expect rural cash flows to improve after the Kharif harvest, which could support disbursements in the December quarter.