Weak monsoon ahead? Karnataka, Maharashtra at higher risk from El Nino: Report

Mumbai: As concerns grow over a possible El Niño-induced weak monsoon in 2026, rain-fed regions of Maharashtra and parts of Karnataka are emerging as the most vulnerable pockets for rural income and credit stress. 

However, India Ratings and Research (Ind-Ra) has said the impact is likely to remain localised and unlikely to trigger any systemic disruption.

In contrast, Tamil Nadu, Andhra Pradesh, and Uttar Pradesh are better placed due to stronger irrigation coverage.

Credit sensitivity is expected to be highest in non-bank finance company–microfinance institutions (NBFC-MFIs), tractor and agri-equipment finance, and agri-linked MSMEs, while large, diversified NBFCs are likely to absorb volatility without lasting asset quality impact unless shocks intensify.

“El Niño conditions and a likely below-normal monsoon are unlikely to cause systemic credit stress in rural and semi-urban areas. The impact is likely to be asymmetric across regions, asset classes, and lenders due to variables such as availability of irrigation cover, credit sensitivity of asset classes, and diversification in the books of lenders,” said Karan Gupta, Director, Financial Institutions, Ind-Ra.

Overall, Ind-Ra termed El Niño 2026 a “monitorable risk” rather than a base-case disruption, with any FY27 volatility expected to be temporary and region-specific.

The agency does not expect a broad-based deterioration in rural asset quality. It noted that beyond aggregate rainfall, the spatial distribution and timing of rains will be key determinants of credit impact. A temporal skew in rainfall—especially during the critical maturity phase of kharif crops—can significantly affect harvest quality, price realisation, and post-harvest cash flows.

Diversified lenders, the report said, benefit from geographic spread, earnings buffers, and stronger collection mechanisms. Repayment pressure typically emerges with a lag, after farm cash buffers weaken, particularly when kharif outcomes affect rabi funding and subsequent income cycles, pushing potential stress into the third and fourth quarters of FY27.

Ind-Ra added that large, diversified NBFCs are better positioned to manage El Niño-related volatility due to calibrated provisioning and robust collection infrastructure. However, NBFC-MFIs and tractor/agri-equipment finance portfolios remain the most sensitive to transient income disruptions, given their higher dependence on farm incomes and limited borrower buffers.