Weak Monsoon Forecast Raises Fresh Concerns For India’s Rs 3 Lakh Crore Microfinance Sector

MUMBAI/CHENNAI: Just as the microfinance sector appears to be emerging from a prolonged asset-quality stress cycle, a weaker monsoon forecast threatens to create fresh challenges. With the India Meteorological Department (IMD) downgrading its southwest monsoon forecast to “below normal” — potentially the weakest in 11 years — concerns are resurfacing for India’s over ₹3-lakh-crore microfinance industry.

The IMD has revised its June-September southwest monsoon forecast to 90% of the long-period average, down from 92% projected earlier. It has also indicated that El Niño conditions are likely to develop during the season. A weaker-than-expected monsoon could hurt agricultural output, strain rural incomes and stoke inflation, prompting microfinance lenders to take a more cautious approach to fresh loan disbursements.

“A weak monsoon could trigger a major supply shock and lift inflation. The MFI sector is likely to withstand the first level of shock as the current guardrails have already reduced its risk exposure.

But prolonged inflation beyond a quarter would be a significant threat, increasing stress for borrowers and adding uncertainty alongside geopolitical tensions,” said the chief executive of a microfinance company. “It is too early to talk about demand sluggishness, but we are closely watching rainfall in August,” the executive added.

LVLN Murty, CEO of Dvara KGFS believes that an erratic monsoon can significantly alter borrowing and saving behaviour in rural India. Failed monsoons often force borrowers to rely on informal credit sources to manage immediate expenses and income disruptions.

“We are taking a cautious approach by closely monitoring the Kharif sowing season, the progress of the monsoon and its impact on rural household earnings,” Murty said. He added that the lender is increasing its focus on income-generation loans to help customers diversify household incomes and strengthen financial resilience during periods of climate or income uncertainty.

This comes at a time when things are improving for the sector. After eight quarters of contraction, the microfinance sector’s gross loan portfolio grew 3.2% quarter-on-quarter to ₹3.31 trillion in Q4FY26, supported by higher loan originations, larger ticket sizes and improving asset quality, according to CRIF High Mark.

Asset quality improved significantly during the period, with PAR 31-180 declining to 2% in March 2026 from 3.4% a year earlier and 4.4% in December 2025.

The weaker monsoon outlook comes at a time when the industry is already grappling with uncertainty arising from the conflict in West Asia. Rising crude oil prices have heightened concerns over inflationary pressures on essential goods, potentially stretching household budgets and affecting the repayment capacity of microfinance borrowers.

“We remain deliberately cautious. Over the past year, we have tightened customer assessments, and with the war and an anticipated weak monsoon, we are further sharpening our customer-acquisition criteria,” the executive cited earlier said.

The improvement follows a series of guardrails introduced by the two microfinance self-regulatory organisations, Sa-Dhan and MFIN, including a cap of ₹2 lakh on total outstanding debt per borrower and a reduction in the maximum number of lenders per borrower to three from four.

“The industry’s diversified portfolio should limit the immediate impact, but a weak monsoon may slow disbursements. As forecasts point to a rainfall deficiency, we will continue to monitor developments closely and remain cautious,” said Sadaf Sayeed, MD & CEO, Muthoot Microfin.

“A weak monsoon will weigh on the broader economy, and microfinance borrowers will inevitably feel the impact as their livelihoods are closely linked to economic activity. If the monsoon shortfall and El Niño effects turn out to be severe, lenders will need to be particularly cautious and strengthen credit assessments before extending loans,” said Jiji Mammen, CEO of Sa-Dhan.

Source: The Financial Express